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EUR/USD Recovery at Risk as RSI Fails to Push into Overbought Zone

EUR/USD Recovery at Risk as RSI Fails to Push into Overbought Zone

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EUR/USD Rate Talking Points

EUR/USD clears the September-high (1.1110) ahead of the European Central Bank (ECB) meeting, and the last interest rate decision with President Mario Draghi may do little to curb the recent appreciation in the exchange rate as the Governing Council is widely expected to retain the current policy.

EUR/USD Recovery at Risk as RSI Fails to Push Into Overbought Zone

EUR/USD appears to be making a run at the August-high (1.1250) as the ECB lays out a growing case for European policy makers to shore up the monetary union.

In his latest speech, President Draghi reiterates “governments with fiscal space that are facing a slowdown should act in an effective and timely manner” even though the central bank stands ready to “adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

At the same time, ECB board member Francois Villeroy de Galhau aruges that “all available instruments need to be mobilized, including fiscal policy, as a complement to monetary policy” in order to combat the downside risks surrounding the Euro area.

Image of ECB interest rates

It seems as though the ECB will continue to rely on its unconventional tools to insulate the monetary union as the Governing Council remains reluctant to push the Main Refinance Rate, its flagship benchmark for borrowing costs, into negative territory.

As a result, the Governing Council may continue to push monetary policy into uncharted territory as the central bank struggles to achieve its one and only mandate for price stability. However, the divide at the ECB may force incoming President Christine Lagarde to endorse a wait-and-see approach for monetary policy as the account of the September meeting reveals a range of different views within the Governing Council.

In turn, the ECB may merely attempt to buy time at its next meeting on October 24, and more of the same from the Governing Council may do little to curb the recent appreciation in EUR/USD as the Governing Council is widely expected to retain the current policy.

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EUR/USD Rate Daily Chart

Image of EUR/USD daily chart

Source: Trading View

  • Keep in mind, the broader outlook for EUR/USD remains 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 (1.0879) in October.
  • However, recent price action warns of a larger correction as EUR/USD clears the September-high (1.1110), while the Relative Strength Index (RSI) continues to track the bullish formation carried over from the previous month.
  • Need a break/close above the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) to bring the August-high (1.1250) on the radar, with the next area of interest coming in around 1.1270 (50% expansion) to 1.1290 (61.8% expansion).
  • Will keep a close eye on the RSI as the oscillator struggles to push into overbought territory, and the bullish momentum may continue to abate amid the failed attempt to break above 70.

For more in-depth analysis, check out the4Q 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.