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EUR/USD May Be Heading Into Correction Territory

How far can it go?

EUR/USD broke above the descending channel early on Tuesday in a move that may be indicative of a correction being underway.

The breakout followed comments by Fed Chair Jerome Powell on Friday when he reaffirmed the view that the Fed is still considering tapering this year while also urging caution and patience. More importantly, he stressed that tapering and rate hikes are not linked, which put concerns around higher interest rates at ease.

The weakness in the dollar that has followed, drove the EUR/USD pair towards the top of the descending channel, with it breaking above at one stage and giving the impression that a correction has started.

Of course, these things are rarely that simple and the pair has since pulled back to trade around 1.18, just back inside the channel.

A daily close above the channel, particularly one involving a rotation off 1.18, would look quite bullish and could draw attention to potential resistance levels above.

The 200/233-period SMA band on the 4-hour chart falls around 1.18 which also coincides with prior resistance. And while the MACD and stochastic have levelled off a little, there’s no clear divergence at this point to suggest the rally has run its course.

If we are seeing a breakout, 1.19 stands out as the next major test, coinciding with prior resistance and the 38.2% retracement level (daily chart).

Ultimately, the big test would come around the 50/61.8 fib levels, which coincides with the 200/233-day SMA band and covers 1.20, a potential psychological barrier.

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