It is Never Time to Try and Catch a Falling Knife

Last week we said on a purely technical basis the break below 1.1260 completed a wave-4 triangle for a final push lower in the days ahead in a 5-wave decline to new lows around the 1.0750-1.0800 level. So where do we stand after a week of central bank rate decisions, quantitative easing and non-farm payrolls?

Last Thursday the long awaited ECB meeting and Super Mario Draghi failed to excite the market. Even with upward revisions to GDP for the upcoming years the market believed that these were too optimistic and any EUR/USD gains were short-lived as the price continued lower heading into Friday's non-farm payrolls. The jobs report surprised once again to the upside adding 295,000 new jobs with the unemployment dropping to 5.5%. However, the market ignored (at least on Friday) average wages which remain week with lower than expected growth, as it only focused on bullish dollar numbers.

People are now looking for a rate-rise back in June again from the FOMC. I have seen some people calling for April, but given that the majority of numbers have been weak out of the States and combined with the near-record open short EUR/USD position on the COT report we believe the mighty dollar may be approaching a turning point.

The EUR/USD could remain under pressure as we approach the March 18th FOMC meeting, but with Janet Yellen saying that the Fed's reliance on data releases will decide the rate policy, this week’s retail sales and PPI numbers may signal the end (temporarily) of this amazing bullish dollar run with the EUR/USD dropping almost 3 percent last week alone.

Expectations are for retail sales to recover from the unexpected drop of January with a 0.5% increase. Whether we beat expectations may ultimately decide the fate of this dollar. If these are combined with the 0.2% increase the market is looking for in Friday's PPI number (which the market looks at as weak), we will be sitting here next week writing that a low has been made in the euro.

Technically the pair is oversold on a daily basis and with the MACD turning bearish last Tuesday there is still room for the pair to trade lower. The next major support comes in around the 1.0760 price zone which would retest the lows from 2003. However, we would not try and catch a falling knife by leaving buy orders in the market as the final move in any trend is often an exaggerated spike, so we would wait for confirmation that a low is in place before confidently calling for what should be a multi-week/month rally.

Looking at the two hourly charts it is clear that with the RSI only just coming out of the oversold area there could be a chance of a small recovery before going lower, but there is certainly no sign that a low is in place yet. Sellers are expected to emerge as we approach the 1.1100 with a further target on the downside in the 1.0503-1.0530 zone. Fifth-waves are ending waves so once this wave completes it will mark the end of a 5-wave decline from May 2014.

Looking at the short-term chart we can see that we are in the wave-4 correction which, although unlikely, could take us up to test 1.100 before the final push lower. With three Fed members talking today, the market will look for any indicators of an early rate-rise and push this Euro to new multi-year lows. But could the numbers at the end of the week be the final nail in this dollar-inspired rally? We will wait to see a 5-wave advance from new lows as confirmation.

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