EURNZD Head and Shoulders (May 22, 2015)

The pair is testing the neckline support at the 1.5100 handle and may be due for a breakdown soon. For now, stochastic is indicating oversold conditions, which means that sellers are taking a break.

A convincing break below support could confirm the potential downtrend, which might last by around 300 pips or the same height as the chart pattern. Downbeat remarks from ECB members Coeure and Noyer sparked a sharp euro selloff earlier this week and may continue to weigh on this pair.

On the other hand, if the 1.5100 handle still continues to hold as support, the pair could bounce back up to the area of interest at the 1.5200 mark or until the very top at 1.5400. Event risks for this setup include a speech by ECB Governor Draghi during the London trading session and the release of the German Ifo business climate index, which is expected to dip from 108.6 to 108.3. A lower than expected reading could lead to more losses for the pair.

The short-term exponential moving average has just crossed below the longer-term EMA on the 1-hour chart, an early signal that a selloff is set to take place. Shorting at the 1.5050 area which is significantly below the neckline support could catch the initial downside break, although waiting for a pullback to the neckline after the breakout could be a more prudent entry.

No other reports are lined up from New Zealand for today, as the Kiwi could continue to stay supported against the euro. Note that PMI readings from both Germany and France came in mostly below expectations for May, hinting at another potential slowdown in the region.

By Kate Curtis from Trader's Way