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EUR/USD Rate Risks Larger Recovery as Bullish RSI Signal Takes Shape

EUR/USD Rate Risks Larger Recovery as Bullish RSI Signal Takes Shape

David Song, Strategist

EUR/USD stands at risk of staging a larger rebound ahead of the Federal Reserve and European Central Bank (ECB) interest rate decisions as the pair breaks out of a narrow range. At the same time, the Relative Strength Index (RSI) highlights a key development as the oscillator snaps the bearish formation from earlier this year.

Image of Fed Fund Futures

Even though the Federal Open Market Committee (FOMC) is widely expected to deliver a 25bp rate-hike next week, the updated projects from Chairman Jerome Powell and Co. are likely to influence the near-term outlook for the U.S. dollar as the central bank appears to be on course to phase out the forward-guidance for monetary policy.

With that said, recent comments from Fed officials suggest the central bank will tolerate above-target price growth for the foreseeable future as ‘inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term,’ and ongoing projections for a longer-run neutral Fed Funds rate of 2.75% to 3.00% is likely to drag on the greenback as it saps bets for four rate-hikes in 2018.

Meanwhile, a growing number of ECB officials may push to alter the monetary policy outlook as the quantitative easing (QE) program is set to expire in September, and the fresh comments from President Mario Draghi and Co. may heighten the appeal of the single currency if the central bank unveils a more detailed exit strategy. In contrast, more of the same from the Governing Council may produce headwinds for the euro, with EUR/USD at risk of exhibiting a more bearish behavior over the near-term as the central bank remains in no rush to conclude its easing-cycle. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

EUR/USD Daily Chart

Image of EURUSD daily chart

EUR/USD stands at risk for a larger rebound as it initiates a fresh series of higher highs & lows, while the Relative Strength Index (RSI) breaks out of the bearish formation from earlier this year. A close above the 1.1790 (23.6% retracement) to 1.1810 (61.8% retracement) region opens the door for a move back towards 1.1940 (38.2% retracement) to 1.1970 (23.6% expansion), with the next region of interest coming in around 1.2060 (50% retracement).

For more in-depth analysis, check out the Q2 Forecast for the Euro

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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