EUR/USD Rebound in Focus as RSI Breaks Out of Bearish Formation

EUR/USD bounces back after filling the price gap from 2017, and the exchange rate may stage a larger rebound ahead of the European Central Bank (ECB) meeting on March 12 as the bearish momentum abates.

Recent remarks from ECB officials suggest the central bank will stick to the sidelines for the foreseeable future as board member Francois Villeroy de Galhau expects the coronavirus to have “negative but temporary consequences,” and the President Christine Lagarde and Co. may continue to endorse a wait-and-see approach as “members saw indications that the Governing Council’s September package was being gradually transmitted to the economy.”

In turn, more of the same from the ECB may fuel a large rebound in EUR/USD as the central bank tames speculation for additional monetary support, but it seems as though the Governing Council will expand its balance sheet by EUR 20B/month throughout 2020 as the board struggles to achieve its one and only mandate for price stability.

At the same time, the Federal Reserve appears to be on track to retain the status quo as Vice Chair Richard Clarida insists that the “US economy is in a good place,” with the official going onto say that “the current stance of monetary policy likely will remain appropriate” following the rate easing cycle in 2019.

As a result, the Federal Open Market Committee (FOMC) may tame speculation for lower interest rates, but it remains to be seen if Fed officials will alter the forward guidance when the central bank updates the Summary of Economic Projections (SEP) in March as the coronavirus dampens the outlook for global growth.

With that said, EUR/USD may continue to face headwinds in 2020 as the ECB relies on non-standard measures to support the Euro area, but the recent rebound in the exchange rate may gather pace as the bearish momentum abates, with the Relative Strength Index (RSI) breaking out of the downward trend from earlier this year.

EUR/USD Rate Daily Chart

Source: Trading View

Keep in mind, the monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with the high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.

With that in mind, the opening range is in focus for March, but recent price action raises the scope for a larger rebound in EUR/USD as the exchange rate extends the series of higher highs and lows from the February low (1.0778).

The break/close above the 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement) region opens up the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement), with the next area of interest coming in around 1.1040 (61.8% expansion).

Will keep a close eye on the Relative Strength Index (RSI) as it bounces back from oversold territory and breaks out of the bearish formation from earlier this year.

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--- Written by David Song, Currency Strategist

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