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Euro uptrend bullish amid ECB easing expectations

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With expectations that the European Central Bank (ECB) will undertake easing measures in June largely factored in by the market, any policy moves could provide the basis for a potentially strong upward eur/usd rise according to charts.

ECB president Mario Draghi said in Brussels last week that "the [ECB's] governing council is comfortable with acting next time [June policy meeting]," boosting speculation that the central bank could take action to shore up growth and keep inflation from falling too low. The eur/usd chart shows the market is moving towards consensus agreement on this announcement and is now ready for a potentially strong upward move.

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Many traders are cautious about trading around the release of policy statements and statistical reports as the FX market often moves very rapidly on such announcements. Traders who are long when the market moves down following an announcement find it difficult to exit positions. Usually the risk component of the risk-reward equation increases in news-event trading.

The eur/usd weekly chart suggests the risk around possible easing action at next month's ECB policy meeting is lower than usual. A few chart features support this conclusion.

The first is up-sloping trend line A. The position of this trend line is calculated from the lows in July 2013, September 2013 and February 2014. The line's position is confirmed by the April and May 2014 lows near the uptrend. This is a well-established trend line, so there is a high probability that price activity will continue to use this trend line as a support level.

The second feature is the strong historical resistance level near $1.40. This resistance level has been tested in March and May 2014. A breakout above this level is often very powerful as shown in April 2011 when the pair moved from $1.40 to $1.455 in six weeks.

Often this combination of an up-sloping trend line and a strong resistance level creates an up-sloping triangle pattern. This pattern does not appear in the eur/usd chart, so we cannot apply triangle pattern breakout analysis to calculate the upside target.

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The eur/usd moves in wide trading bands. The width of the trading band is measured and then this value is projected upwards obtain a breakout target. The current trading band is between $1.34 and $1.40. The upside projection target is $1.46. The historical resistance level is near $1.455, so traders will use $1.455 as the breakout target.

The ECB announcement combined with this bullish chart pattern will create sharp intraday moves and these provide scalping opportunities for related euro crosses. We will apply our ANTSSYS trading approach to capture 100 to 200 pips on these trades.

In the next several weeks traders expect the eur/usd to trade between the value of trend line A and the resistance level near $1.40. This is a type of compression activity that shows increasing bullish pressure in anticipation of the ECB easing action at next month's meeting. The size and nature of this ECB easing policy will determine the strength of the breakout above $1.40. Traders should watch for a fast breakout and then a retreat and retest rebound of $1.40 as a support level.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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