EUR/USD has been carving out a series of lower swing highs and lower swing lows on the daily candle chart (below) – creating a bearish descending channel.
Last Friday’s better than expected nonfarm payrolls has seen a resumption of U.S. dollar strength and caused EUR/USD to move lower from the top of the channel.
This well-established channel has mapped a path for the market to potentially retest a key area of support at 1.0634.
EUR/USD Daily Candle Chart:
This morning’s weak European HCOB services PMI has seen EUR/USD start to break below support at 1.0766.
If we drop down a timeframe and look at the 4hr candle chart (below), we can get a better look at this morning’s break of support.
Should the 4hr candle chart close below support, this could setup a short trend continuation trade.
Aggressive breakout traders could enter at market, while more conservative traders looking for better potential risk / reward could wait for a retest of the broken support area.
EUR/USD 4hr Candle Chart:
Risk management
Those looking to trade this pattern could use Monday’s highs at 1.0809 for stop placement and the key support area at 1.0687 - 1.0634 for targets.
Traders should be wary of 'fakeouts' where the market breaks below support only to rebound and stop out weak handed short positions.
On the economic calendar we have European Producer Price Index data this morning and U.S. factory orders this afternoon. These events have the potential to increase EUR/USD’s volatility.
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