Euro Versus The US Dollar (EUR/USD) Could Drop Further

The Euro dropped almost 300 pips from 1.3859 to 1.3543 against the US dollar last week when European Central Bank President Jean-Claude Trichet said inflation risks are “broadly balanced,” dimming the prospect of an increase in interest rates. The comments on the inflation outlook disappointed investors who were betting on euro zone interest rates would rise ahead of those in the US. Friday’s employment report in the US also snapped euro’s spine. While having a disappointing non-farm employment change of only 36,000 for the month of January which is usually bearish for the USD (bullish for the EUR), US’s jobless rate came in with a surprise as it unexpectedly improved to 9.0%, a level not seen for quite some time, as compared to the 9.5% forecast. the upward revision in December’s employment change from 103,00 to 121,000 also sparked some US dollar buying.

In the process, the EUR/USD, in the 4-hour chart, broke down from its uptrend and went all the way down until it found some support at the 1.3540 area which propelled the pair for a mini bounce. However, the EUR/USD could further drop as the rally drew the right shoulder of a possible  head and shoulders pattern. If the pair breaks below the neckline of the said pattern, we can aim for the 1.3250 target price. I got this by gauging the size of the head and shoulders and added it to the possible breakdown point. However, before it reaches that level, there could be some buying pressure at the 1.3400 price mark. In case the EUR/USD heads up once again, its immediate hurdle could be 3-day downtrend line. Then after that could be the 1.3677 resistance.

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