While China’s yuan remains pegged, traders will likely take their cues from charts. A year ago, the Euro/U.S. dollar rate (EUR/USD) formed a double top in January and February 2004. From the second top, the pair headed lower for 11 weeks before stalling and eventually resuming its major uptrend.
In 2005, EUR/USD is on the verge of forming another potentially bearish reversal formation — the head-and shoulders pattern. The pair peaked on Dec. 31 and has been declining since.
If it follows the same pattern, EUR/USD should extend its decline for seven or eight weeks, which should take it down through late February or early March. It could slide as low as the 1.2200 area, but it will first have to break below the 1.2600 area, shown. Following this significant low, the pair should resume its major uptrend.
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