EUR/USD remains constructive, but the formation of a bull trap raises caution

EUR/USD remains on the front foot in early Thursday trading, holding just below the new three-week high (Wednesday’s spike at 1.0816).

Bulls are probing through the cracked daily Kijun-sen (1.0791) and eyeing a retest of the daily cloud top (1.0808).

Although the cloud top was dented on Wednesday, the subsequent pullback from the new high and daily close well below the cloud top generates an initial signal of a bull-trap formation, raising caution of a potential stall.

Adding to the negative signals for the single currency was a sharp drop in German industrial orders in May, which contributes to the weak picture in the manufacturing sector, which has been in contraction for two years.

The technical picture has further improved on the daily chart, with rising positive momentum and moving averages turning to an almost fully bullish setup. However, a sustained break above the pivotal 1.0800 resistance zone (converged 100/200 DMAs, psychological level, daily cloud top) is required to confirm a bullish stance and signal the continuation of the recovery leg from the 1.0666 higher base.

Otherwise, the downside is expected to remain vulnerable despite the prevailing bullish bias above the cloud base (1.0771) and the strong rally on Wednesday.

A loss of the cloud base would generate an initial negative signal, with a drop below the daily Tenkan-sen (1.0741) confirming a reversal and exposing the 1.0666 base for a retest.

Markets are expected to operate with lower volumes today, as the US is closed for Independence Day. However, the UK election, as the top event today, may increase volatility.

Res: 1.0808; 1.0820; 1.0852; 1.0889
Sup: 1.0771; 1.0741;  1.0723; 1.0700