EUR/USD could make further gains on this chart pattern

EUR/USD has gained nearly 2.5% in the past seven days on a broader USD weakness. The buyers are now attempting to break the psychologically-important $1.10 resistance, with further gains possible on the bullish inverse head and shoulder chart pattern.

Fundamental analysis: ECB issues a warning

The chief economist at European Central Bank (ECB), Philip Lane, said that the bank can further adjust its instruments if needed in another attempt to reassure investors and boost business activity. The ECB left its key interest rate unchanged in yesterday’s meeting. 

“We will adjust PEPP composition as much as necessary, for as long as needed,” said Lane. The PEPP refers to the “Pandemic Emergency Purchase Programme”, a 750 billion euros stimulus plan launched by the ECB in March.

Lane also said that the basic task of every central bank is to “counter destabilizing forces,” such as the COVID-19 outbreak and national lockdowns that have hampered business activity in the past few weeks. 

Separately, the ECB warned today that the eurozone’s GDP could contract by 5% to as much as 12% this year. Accordingly, the ECB has highlighted three scenarios for this year that could see GDP contract 5% (mild scenario), 8% (medium scenario) or 12% (severe scenario). 

This assessment is practically in line with ECB Governor Lagarde’s comments yesterday that EU GDP could shrink by 15% in the second quarter. 

Lagarde’s assessment of the EU economy hasn’t deferred the euro bulls from pushing EUR/USD higher to a 1-month high near the psychologically-important $1.10 level. Analysts spent yesterday’s afternoon mostly scratching their heads as to why the EUR has bursted higher against the dollar. 

“There were many attempts to explain the unexpected move in the pair, but perhaps the simplest reason is the divergence in monetary and fiscal policies between the EZ and the US. Although both regions are trying to maintain expansionary posture, the massive monetary and fiscal spend in the US is far greater and is starting to perhaps weigh on the dollar,” wrote Boris Schlossberg, Managing Director at BK Asset Management.

Technical analysis: EUR bulls eye more gains

EUR/USD made substantial gains in two consecutive days as the greenback moved lower across the board. The pair has continued to press higher today, coming close to the psychologically-important 1.10 mark. 

Actually, a break of the 1.0890 resistance activated an inverse head and shoulders chart pattern, which is considered a reversal bullish formation. A break of the neckline (the purple diagonal line) activated the pattern yesterday, to ultimately trigger stops above 1.09.

A move to 1.1050 would mark the completion of this pattern, which signals further gains of around 70 pips from the current levels. Still, the EUR bulls will have two face two key moving averages – 100 DMA and 200 DMA – before reaching 1.1050.

Summary

EUR/USD made substantial gains in the past two days as the bulls continue their move higher today as well. The ECB warned that EU GDP may contract as much as 15% in the second quarter on the COVID-19 outbreak and national lockdowns that continue to hurt business activity across the eurozone.