EUR/USD: Bearish engulfing pattern snaps retracement channel
11:31, 16 October 2023
There’s a lot to unpack on EUR/USD’s daily candle chart (below), so let’s start at the turn of the month with EUR/USD pressing down into the lower Keltner Channel having broken below a key level of support.
From this oversold position in early-October, EUR/USD put in a steady retracement higher, forming a small ascending retracement channel. This retracement took the market back to a confluent area of resistance in which the 20-day exponential moving average (EMA), the descending trendline from the summer highs, and the broken support level all intersected.
On Thursday, a retest of this confluent resistance area coincided with the release of US inflation data (CPI) which came in hotter than expected. This led to a strong sell-off which saw EUR/USD print a large bearish engulfing candle which broke and closed below the retracement channel.
Short-term momentum has now realigned with the bigger picture downtrend, leaving EUR/USD looking vulnerable and a retest of the October swing lows the most likely scenario.
EURUSD Daily Candle Chart
Traders looking to short EUR/USD’s downtrend could place stops above the descending trendline or 20-day EMA with a view to targeting a retest of the October swing lows.
On the economic calendar, we have U.S. retail sales figures for September on Wednesday, European inflation data on Thursday and the Federal Reserve publishes its Beige Book. These events have the potential to increase volatility for EUR/USD and should be accounted for in stop placement and position sizing.