EUR/USD has been bullish in October, rallying from the low on the year around 1.25 up to about 1.2886. This rally can be interpreted as a consolidation or, we can say a bullish correction against the prevailing downtrend. The questions for this type of price action are often.
1) How much more upside risk is there?
2) How do we know if EUR/USD is continuing its downtrend?
Let’s try to answer that.
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Consolidation, China GDP:
The 4H chart shows EUR/USD starting the week in a consolidation within a consolidation, ranging between roughly 1.27 and 1.2886. There’s a big of congestion and price action has been tentative during the Monday session. There’s a void of key fundamentals until tonight’s Chinese GDP, which can have an indirect effect through risk sentiment. Strong GDP bringing about risk appetite would likely give EUR/USD a boost. Otherwise, EUR/USD might remains neutral, and maybe even slide as the USD gains from risk aversion. China is forecast to have grown 7.2% in Q3 compared to Q3 of 2013. The Q2 reading was 7.5%. The 7.2% would be the lowest since Q1 2009, so the forecast reading can bring a bit of bearish bias.
Now, if there is risk appetite after the GDP data, and EUR/USD breaks above 1.28, it will clear above the 200-, 100-, and 50-period simple moving averages (SMAs) in the 4H chart. This should first open up the 1.2886-1.29 area in the near-term. We should expect some resistance here, but if price can hold above the 1.28 area, or return above it after a brief break, the bullish correction scenario is still alive, and the upside risk remains toward the 1.2995-1.30 area. In the daily chart, we can see that this is a previous resistance pivot, and there is a falling trendline just above the 1.30 handle. A break above the 1.30 handle and this falling trendline from 1.3993 would be a strong bullish signal especially if the daily RSI pops up above 60 to show loss of the prevailing bearish momentum. But for now, let’s limit the bullish outlook to 1.30.
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Bearish Outlook: If instead of breaking above 1.28, the market falls below 1.27 after the China GDP data. This would likely break below October’s rising trendline, and will almost clear below the 200, 100, and 50-period SMAs in the 4H chart. If the 4H RSI also drops below 40, we would have a trifector of bearish continuation signals, which would open up the 1.25 low. We might still want to make sure that a pullback doesn’t revive the bullish correction. If price holds below 1.28, we should be confident that bears are dominating the pair again.
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