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EURUSD Rate Rebound Undermined by Bearish RSI Signal

EURUSD Rate Rebound Undermined by Bearish RSI Signal

2019-09-30 02:30:00
David Song, Currency Strategist
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EUR/USD Rate Talking Points

EUR/USD bounces back from a fresh 2019-low to wrap up September, but the Euro stands at risk of facing a more bearish fate over the remainder of the year as the European Central Bank (ECB) appears to be running out of tools to insulate the monetary union.

EURUSD Rate Rebound Undermined by Bearish RSI Signal

EUR/USD attempts to retrace the decline from the previous week as Governing Council officials attempt to talk down the risks surrounding the Euro area, but the opening range for October may keep the downside targets on the radar as the rebound following ECB meeting unravels.

Recent comments from Bank of Italy Governor Ignazio Visco suggest the ECB will continue to support the economy as the Governing Council member insists that the central bank “must counter the significant risk that the economic slowdown and the low level of inflation translate into a permanent reduction in inflation expectations.”

Mr. Visco went onto say that “the Governing Council unanimously agrees that, given the slowdown in production and the significant downside risks that weigh on the outlook, fiscal policy must make a more incisive contribution to strengthening aggregate demand,” and added that the recent monetary stimulus package was “not made in haste” as Bundesbank Vice-President Sabine Lautenschlager unexpectedly resigns from the ECB’s Executive Board.

Image of ECB interest rates

It remains to be seen if the ECB will continue to push monetary policy into uncharted territory as President Mario Draghi’s tenure expires at the end of next month, but it seems as though the Governing Council will continue to endorse a dovish forward guidance at the next meeting on October 24 as the central bank “continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

In contrast, the Federal Reserve appears to be taking a more patient approach in managing monetary policy as Chairman Jerome Powell and Co. see the benchmark interest rate around 1.50% to 1.75% ahead of 2020, and the Federal Open Market Committee (FOMC) may revert to a wait-and-see approach at the next meeting on October 30 as the central bank delivers back-to-back rate cuts.

Image of Fed Fund futures

Keep in mind, Fed Fund futures still show a 50/50 chance for another 25bp reduction in October, but the fresh updates to the US Non-Farm Payrolls (NFP) report may push the central bank to the sidelines as the economy is anticipated to add 145K jobs in September.

With that said, the ECB’s commitment to its price stability mandate may keep EUR/USD under pressure as the central bank struggles to achieve the inflation-target, and the recent rebound in the exchange rate may prove to be short-lived as recent developments in the Relative Strength Index (RSI) offer a bearish signal.

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EUR/USD Rate Daily Chart

Image of eurusd daily chart

Source: Trading View

  • Keep in mind, the broader outlook for EUR/USD is tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0905) in September.
  • Recent developments in the Relative Strength Index (RSI) foreshadows a further decline in the exchange rate as the oscillator snaps the bullish formation from earlier this month.
  • In turn, the failed attempt close above the 1.1100 (78.6% expansion) handle brings the downside targets back on the radar, with the lack of momentum to hold above the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement) raising the risk for a move towards the 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement) area.

For more in-depth analysis, check out the 3Q 2019 Forecast for Euro

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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

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