EUR/USD: A top thrill 450-pip round trip

<p>“Zero to 120 MPH in less than 4 seconds. A few seconds later, you’re 420 feet in the air. In the race for pure adrenaline […]</p>

“Zero to 120 MPH in less than 4 seconds. A few seconds later, you’re 420 feet in the air. In the race for pure adrenaline thrills, there is one winner: Top Thrill Dragster. Nothing else compares to this high-horsepower shot into the sky. From a standing start you’re launched forward, then straight up, then straight down and back to the finish line. The ride may be over in 17 seconds, but it’ll stay with you forever.”

The above quote comes from a description of the Top Thrill Dragster roller coaster at Cedar Point amusement park in Ohio, but it just as easily could describe the past week’s price action in EUR/USD. The world’s most widely traded currency pair exploded through resistance at 1.1200 this time last Thursday and surged all the way above 1.1700 by Monday before crashing back down to earth yesterday. As of writing, rates are peeking back below the 200-day moving average near 1.1300, and a return back to the “starting line” at 1.1200 by the end of the week would hardly be surprising, especially after today’s preliminary US GDP report.

The second estimate of Q2 GDP in the world’s largest economy was undeniably better than the first. The Bureau of Economic Analysis now estimates that the US economy grew at a 3.7% annualized rate in Q2, far better than initial estimate of 2.3% and the expected uptick to 3.2%. This reading was higher than all 74 forecasts in a pre-release Reuters poll of economists. Crucially, personal consumption rose at a 3.1% rate in the quarter, better than the already-strong 2.9% initial estimate; this component of GDP is seen as the most sustainable and “healthy” way for an economy to grow, in contrast to a temporary rise in inventories for example.

Turning our attention back to EUR/USD, the false breakout above the 200-day MA and previous resistance level at 1.1450 has no doubt unnerved many bulls. If the market starts to price in a higher probability of a September rate hike in the wake of today’s strong GDP report, the EUR/USD selling could accelerate further from here. The aforementioned previous-resistance-turned-support level at 1.1200 may provide some support, but if that level gives way, a move down to the 50-day MA near 1.1100 could easily be in the cards.

Astute traders will be watching the near-term bullish trend line in the RSI indicator: if that level gives way, it would signal that the momentum has shifted back in favor of the bears and could serve as a technical signal that more downside is likely. As we’ve seen over the last couple of days though, the market can turn on a dime, so EUR/USD bears should be on guard against a break back above the 200-day MA and especially the 1.1450 level, which could signal that the recent roller coaster ride is far from over.

EURDAILY8-27-2015 8-49-22 AMSource: City Index

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