EUR/USD hits 3-year high as dollar fails to catch bid

The dollar was unable to find a bid on the back of today’s mixed-bag inflation and retail sales data from the world’s largest economy. As a reminder, the headline Consumer Price Index rose only by 0.1% month-over-month in December, which caused the year-over-year rate to decline to 2.1% from 2.2% previously, as expected. Core CPI, however, rose by a stronger-than-expected 0.3% month-over-month, which helped to lift the year-over-year rate to 1.8%. Meanwhile, both headline and core retail sales rose 0.4% month-over-month each, with the headline missing and core beating expectations. The dollar bulls were unimpressed by these figures and decided to step aside ahead of the long weekend with U.S. banks being closed on Monday in observance of Martin Luther King Day. The FX markets will operate normally, although volumes are likely to be low, while U.S. stocks will be shut for trading and U.S. index futures will close when London goes home. Meanwhile, the euro has found additional support from news German political leaders has apparently agreed to begin formal talks to form a “grand coalition.” As a result, the euro/U.S. dollar (EUR/USD) currency pair has surged to 1.2150, thus achieving its best level since December 2014.

The technical outlook on the EUR/USD obviously looks bullish following its move back above the 2017 opening price of about 1.20 and its subsequent break above long-term resistance at 1.2040/50 area, which was the low back in the summer of 2012 when we are at the height of the Eurozone debt crisis. Today it has also broken above last year’s high of 1.2090/5 to go north of 1.2150. Thus, the path of least resistance is to the upside and will remain that way until and unless price creates a reversal pattern at higher levels or breaks below a previous swing point, such as this year’s low at 1.1915.

Going forward, we expect the dips into old resistance areas such as 1.2090 and 1.2060 to be supported. But we will turn cautious in the event price goes back below the yearly open, at 1.2000 and will drop our bullish bias completely in the event it breaks below that 1.1915 level. As price is breaking out to new multi-year highs, there are not a lot of further immediate prior reference points to watch. But there are lots of Fibonacci levels, which can sometimes provide “invisible” support or in this case resistance. As per the chart, the next Fibonacci level comes in at just below 1.2140, which marks the 127.2% extension level of the most recent corrective move. The 161.8% extension level of the same swing is at just below the 1.22 handle. Meanwhile, the 127.2% extension level of the longer-term price swing from the 2017 high comes in at just below 1.2240. It is also worth watching the round and mid figures, such as 1.2150, 1.2200, 1.2250 etc. for signs of resistance. Ultimately, though, the trend is bullish, so any short-term weakness should be treated as a retracement rather than reversal until there is a clear break down in market structure.