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EUR/USD attacks 1.18 as dovish Powell sparks a powerful rally

The dollar cratered on Friday, but will the sell-off continue? The technical analysis says so..

Traders continued to sell the greenback on Monday, following the large Friday's drop, and the EUR/USD pair was trying to rise above the important 1.18 threshold.

The dollar dived on Friday as Jerome Powell failed to announce the starting month for the long-anticipated tapering process.

Regarding the timing for tapering, he only mentioned that "if the economy evolves broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year." Earlier in the month, several FOMC speakers had said that the Fed needs to start tapering sooner rather than later. Thus Powell failing to communicate the starting month was a negative surprise.

Big banks expect tapering in November

We do not expect a tapering announcement in September but do expect it November, with the likelihood that the actual reduction in the pace of purchases begins in December, said John Velis, foreign exchange strategist at Bank of New York Mellon, in a note to clients. EURUSD exchange rate

Analysts at the investment banking giant Goldman Sachs expect a similar path. They anticipate a November announcement, December start, and September 2022 as the conclusion to the tapering process.

Additionally, they think the USD will stabilize over the following weeks and possibly decline against certain currencies with attractive domestic fundamentals.

Later in the day, investors will pay attention to pending home sales and the Dallas Fed Manufacturing business index for Auguste. However, these data rarely cause any market movements.

The most critical data of this week is Friday's US labor market update . Should we see a strong payrolls print, the greenback might shake off some of its recent weakness as the Fed still appears dependent on the labor market when judging its monetary policy.

Bulls in charge

As we previously mentioned, the massive falling wedge pattern has been formed, and now it has been confirmed by the breakout above 1.1750. Therefore, the medium-term outlook now seems cautiously bullish.

The euro is currently testing the first stronger resistance of previous highs at 1.18. Should bulls be successful and push the pair above 1.18, the single currency is expected to rise toward August highs near 1.19. In addition, the bullish divergence between the MACD indicator and the price on the daily chart could also send the euro higher.

The medium-term target lies at the psychological level of 1.20, where the 200-day moving average is also located, reinforcing this selling level.

Alternatively, if sentiment worsens and the EUR/USD pair starts declining again, it needs to defend the support at around 1/1750, where the wedge pattern's broken, bearish trend line stands. A breakdown below that level might be bad for bulls, and the bullish momentum would most likely be over.

EUR/USD daily chart EUR/USD daily bullish divergence

Marek is a cryptocurrency enthusiast with several years worth of experience in the industry. He has been working with numerous cryptocurrency and FinTech projects, where his main r...

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