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EUR/USD continued its grind lower and eventually returned back below the 1.3170 line that capped it between September and December 2012. This is a continuation of the break below the uptrend channel.

EURUSD Extends head and shoulders breakdown - Click image to enlarge
EURUSD Extends head and shoulders breakdown – Click image to enlarge

Will the pair settle in the lower range?

The day began with a better tone: an upbeat release from Germany’s IFO sent the euro higher. However, euro/dollar was unable to breach the 1.3255 line, and its bounce from the big fall of the previous day seemed like a dead cat bounce.

What happened next is a usual dead-cat bounce reaction: if it can’t recover, a new fall occurs.

The EU Commission released its winter report that painted a gloomy picture regarding the economic output of euro-zone countries as well as budget deficits. In addition, the looming Italian elections also weigh on the single currency.

Under 1.3170

So, the pair lost the 1.3170 line. This line was first met in mid-September 2012 and was challenged several times since then, as the chart shows. After breaking higher, the pair traded in an uptrend channel and even managed to temporarily shoot above this channel and reach 1.37.

But, the return to the channel happened quickly, and the pair found itself sliding lower. The breakdown below the channel began was also a breakdown in a head and shoulders pattern and this started a rapid descent and now the pair is back to the old range.

Here is a view of the Head and shoulders (the two higher thick black lines):

EURUSD Head and Shoulders Chart - Click image to enlarge
EURUSD Head and Shoulders Chart – Click image to enlarge

Where will it go from here? Support appears at 1.3130, 1.31 and 1.30 of course. Higher resistance remains at 1.3255, followed by 1.3290. For more levels, see the EUR/USD forecast.