Mapping the Market: Euro could be approaching pivotal point

June 5 (Reuters) – The euro has struggled against the dollar this year and appears to be approaching a critical juncture on the charts that could decide whether it stabilizes or drops into a lower range.

Since hitting a 4-1/2-year high in ​January, the euro has been on a downward trend due to energy shocks and safe-haven buying ‌of the dollar stemming from the Iran war, as well as European economic underperformance compared with the United States. Volatility related to the conflict has made it difficult to distinguish signal from noise in markets, but there are some indications the euro is not on firm ​footing.

The most prominent warning sign now of further losses is a classic head-and-shoulders top forming on the monthly ​chart. This is a pattern in technical analysis that typically indicates a reversal in trend, ⁠where the market shifts from bullish to bearish. Think of it like a silhouette: a left peak, a higher central ​peak — the “head” — and now a lower right peak forming as the market drifts back down. A neckline is drawn underneath ​the troughs on either side of the head, and when the price dips below this line, it is usually a strong indication that further selling may occur.

The neckline for this formation is near 1.1425, and a convincing fall below that level — like a monthly close, for ​example — would raise expectations of a slide toward the 1.0800 to 1.0900 area.

Adding weight to that bearish picture is ​a warning from the monthly Relative Strength Index, a tool that measures the momentum behind price moves. When prices continue to make ‌new highs ⁠but the RSI diverges lower instead of hitting a new peak, this can signal that buying momentum is losing strength — and that a reversal or pullback might be imminent. That is exactly what happened here: monthly RSI did not confirm the multi-year high in January, a classic red flag.

Further reinforcing the cautious outlook are 15-month Bollinger Bands — a measure of ​price volatility that frames where ​a market is trading relative ⁠to its recent range. Those bands, which were expanding during the euro’s rise, are contracting, potentially indicating an end to the upswing and possibly a downturn.

On the other hand, ​if the euro were to rise back above the 1.1850 to 1.1900 area, that would ​negate the head-and-shoulders ⁠pattern and point to more stability, and possibly fresh gains.

What the chart shows:

(Daily markets commentary from Reuters analysts on the signals financial charts are sending — and what they might mean.)