Euro Q3 2022 Technical Forecast: EUR/USD Carves Out Bullish Reversal Pattern, But Caution is Warranted

Euro Price Action in Bottoming-Out Phase?

The euro continued to lose ground against the U.S. dollar in the second quarter, extending the relentless decline that began just over a year ago. There are several factors behind the recent sell-off, but the most important have been the divergence in monetary policy between the Fed and the ECB, the fallout from the Ukraine war and negative market sentiment.

In the past three months, EUR/USD marked a new multi-year low near 1.0350, a key technical zone that has acted as support on several occasions in late 2016 and early 2017, as shown in the weekly chart below. The pair probed this floor twice during Q2, first in May and then in June, although the bears were unable to create a lower low on the second test amid weakening downside pressure, a sign that prices may have bottomed out around those levels.

Although the long-horizon bias remains bearish, there are some indications that the worst may be over in terms of losses for the common currency, at least in the near-term, creating an attractive set-up for traders who like to play “trend reversal” strategies.

EUR/USD Weekly Chart

Chart created using TradingView

Double Bottom Pattern in Play for EUR/USD

Zooming in on the daily chart, it appears that EUR/USD is carving out a double bottom, a bullish reversal technical formation that tends to develop near the nadir of a well-established downtrend while the overall market is volatile.

The double bottom, which develops in the shape of a letter “W”, is composed of two consecutive and similar troughs, divided by an intermediate peak, the pattern’s neckline, where prices, after rallying off the first valley, encountered resistance before pivoting lower on its way to set the second low. In our case, the neckline sits near 1.0760/1.0785.

Heading into the third quarter, the double bottom is nearing completion and confirmation, with EUR/USD advancing towards the neckline, a major resistance, the break of which could give a solid bullish signal. We are not there yet, but 1.0760/1.0785 can be considered the line in the sand, so to speak.

Focusing on the outlook, if EUR/USD manages to punch through the neckline decisively on higher-than-usual volume, the upside momentum could strengthen, setting the stage for the pair to challenge trendline resistance near 1.1100, followed by 1.1195, the 38.2% Fibonacci retracement of the 2018/2022 decline.

Many things will have to go right for this scenario to play out, but the bullish case should not be dismissed despite the pessimism towards the euro.

On the flip side, if the euro stalls, resumes its descent and revisits the 2022 lows, the double bottom pattern would be invalidated, especially if prices breach the floor in question and make a new low. In the event of a sustained drop below 1.0350, all bets are off. There is no significant technical support underneath this area, so EUR/USD could be on its way to parity if 1.0350 is violated.

EUR/USD Daily Chart

Chart created using TradingView