EURUSD has been moving in a downtrend for quite some time, forming a descending trend line in connecting the recent highs. The pair has bounced off the 1.2500 major psychological support level and pulled up to the 1.2650 area, which lines up with the trend line and 200 SMA resistance.
Stochastic is reflecting overbought conditions and showing a bearish divergence with higher highs while price is making lower highs. This could be a sign that the downtrend would resume sooner or later, which might then take EURUSD back to the previous lows at 1.2500.
EURUSD Trend Forecasts
MACD is also in the overbought area, suggesting that a drop to the support level might take place. Stronger selling pressure could even lead EURUSD to form new lows later on.
Shorting EURUSD at market with a stop above the 200 SMA or trend line and a target at 1.2500 could yield a high return on risk. Aiming for new lows could improve the return on risk but it would be prudent to trail the stop once price hits the previous lows.
Event risks for this EURUSD trade include the release of the German industrial production figures and a couple of speeches from FOMC members. Bear in mind that euro zone reports were weaker than expected recently while the US printed an upbeat September NFP reading.
The path of least resistance is to the downside, as the Fed policy is much more hawkish compared to the ECB. The US Fed is moving closer to hiking interest rates, perhaps sometime next year, as the central bank is already winding down its stimulus and is taking economic improvements into consideration. Meanwhile, ECB Governor Draghi and his men have recently cut interest rates in a couple of instances and unveiled targeted LTRO along with the possibility of asset-backed securities purchases.
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