EUR/USD. Smart Money. Bulls Are Walking on Thin Ice

[Ben Graham]

A week ago, the EUR/USD pair reversed in favor of the U.S. dollar and began a decline toward the most recent "bullish" imbalance 10. However, this imbalance was reached as early as December 29, produced almost no reaction, and the price has now slipped down to imbalance 9. Strictly speaking, it is still too early to sound the alarm. One should remember that the holidays are over, but the market has not yet fully recovered after the celebrations. Even imbalance 10 cannot be considered invalidated, since any imbalance is a three-candle formation that is deemed canceled only after its base is broken — in our case, the low of December 19. Thus, the bulls can still get out of the current situation without serious damage. But to do so, they need to stop celebrating and start trading.

Last week, there was a liquidity sweep from the swing high of December 16, which served as the basis for the start of the decline. The decline itself is still very weak, and a liquidity sweep is not a pattern — one cannot open trades or draw long-term conclusions based on it. The pair's decline may already be completed this week, since bullish imbalances 9 and 10 are support zones for price. The price may get a second reaction at imbalance 9, possibly combined with a liquidity sweep from the swing of December 19.

The chart picture continues to signal bullish dominance. The bullish trend remains intact: a reaction to bullish imbalance 3 has been received, a reaction to bullish imbalance 8 has been received, and a reaction to bullish imbalance 9 has been received. Despite the fairly prolonged decline of the European currency, the dollar has still failed to break the bullish trend. It had five months to do so and achieved no result. If bearish patterns appear or bullish ones are invalidated, the strategy can be adjusted. But at the moment, nothing points to such a scenario.

There was no significant news background on Friday, and trader activity after the New Year remains minimal.

The bulls have had more than enough reasons for a new offensive for the past three months, and all of them remain relevant. These include the (in any case) dovish outlook for FOMC monetary policy, Donald Trump's overall policy (which has not changed recently), the U.S.–China confrontation (where only a temporary truce has been reached), protests against Trump (which have already swept across America three times this year), weakness in the labor market, the bleak outlook for the U.S. economy (recession), and the government shutdown (which lasted a month and a half but was clearly not priced in by traders). Thus, in my view, further growth of the pair would be entirely natural.

One should also not lose sight of Trump's trade war and his pressure on the FOMC. Recently, new tariffs have been introduced rarely, and Trump himself has stopped criticizing the Fed. However, I personally believe this is just another "temporary calm." In recent months, the FOMC has been easing monetary policy, which is why no new wave of criticism from Trump has emerged. But this does not mean these factors no longer create problems for the dollar.

I still do not believe in a bearish trend. The information background remains extremely difficult to interpret in favor of the dollar, which is why I do not even try to do so. The blue line marks the price level below which the bullish trend could be considered finished. To reach it, the bears would need to push the price down by about 400 pips, and I consider this task impossible under the current information background and circumstances. The nearest upside target for the European currency remains the bearish imbalance at 1.1976–1.2092 on the weekly chart, which was formed back in June 2021.

News calendar for the U.S. and the European Union:

• U.S. – ISM Manufacturing PMI (15:00 UTC).

On January 5, the economic calendar contains one important event. The impact of the news background on market sentiment on Monday will be felt in the second half of the day.

EUR/USD forecast and trading advice:

In my view, the pair may be in the final stage of the bullish trend. Despite the fact that the information background remains on the bulls' side, bears have been attacking more frequently in recent months. Still, I do not see any realistic reasons for the start of a bearish trend at this time.

From imbalances 1, 2, 4, and 5, traders had opportunities to buy the euro. In all cases, we saw some degree of growth. Traders also had opportunities to open new trend-following long positions when a reaction to bullish imbalance 3 was received, after the reaction to imbalance 8, and then after the bounce from imbalance 9. This week, a reaction to bullish imbalance 10 may be received. The target for euro growth remains the 1.1976 level. Long positions can be kept open with stop losses moved to breakeven, or managed at traders' discretion.

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