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EUR/USD Rate Forecast: RSI Offers Bearish Signal

EUR/USD Rate Forecast: RSI Offers Bearish Signal

David Song,
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EUR/USD Rate Talking Points

EUR/USD continues to pullback from the weekly high (1.1175) despite another uptick in Germany’s IFO Business Climate survey, and the exchange rate may exhibit a more bearish behavior over the coming days as the Relative Strength Index (RSI) snaps the upward trend carried over from the previous month.

EUR/USD Rate Forecast: RSI Offers Bearish Signal

EUR/USD struggles to extend the advance from the start of the month even though German business confidence improves for the second consecutive month in December, with the IFO index climbing 96.3 from 95.0 the month prior.

The limited reaction indicates market participants are paying increased attention to the strategy review at the European Central Bank (ECB) as President Christine Lagarde tells European lawmakers that the Governing Council “remains resolute in its commitment to deliver on its mandate.” The comments suggest the ECB will continue to utilize non-standard measures to support the Euro area as the central bank struggles to achieve its one and only mandate for price stability.

Image of European Central Bank interest rates

In turn, the ECB may continue to push monetary into uncharted territory as the central bank reestablishes its asset purchase program, but recent remarks from Governing Council member Robert Holzmannsuggest the central bank is in no rush to provide another round of monetary stimulus as the official insists that “the development of the economy must be taken into account.”

Mr. Holzmann went onto say that “if the trough is over in 2020, interest rates could move,” and positive developments coming out of the Euro area may spur a divide within the ECB as the central bank reiterates that “the Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

It remains to be seen if the ECB will alter the forward guidance under the new leadership as the Office of the United States Trade Representative (USTR) revealed that the Trump administration is “initiating a process to assess increasing the tariff rates and subjecting additional EU products to the tariffs,” and signs of a growing rift may drag on the Euro exchange rate as it raises the risk of a policy error.

In turn, fears of a US-EU trade war along with the diverging paths between the ECB and the Federal Reserve may produce headwinds for EUR/USD, with recent developments in the Relative Strength Index (RSI) offering a bearish signal as the oscillator snaps the upward trend carried over from the previous month.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • 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.
  • Keep in mind, the monthly opening range has been a key dynamic for EUR/USD so far in the fourth quarter as the exchange rate carved a major low on October 1, while the monthly high for November occurred during the first full week of the month.
  • The correction from the yearly-low (1.0879) has spurred a string of failed attempts to break/close above the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement), and the advance from the monthly low (1.1003) may continue to unravel as the exchange rate initiates a series of lower highs and lows.
  • At the same time, recent developments in the Relative Strength Index (RSI) offers a bearish signal as the oscillator snaps the upward trend carried over from the previous month.
  • A result, a move below the 1.1100 (78.6% expansion) handle may spur a move back towards the 1.1040 (61.8% expansion), with the next area of interest coming in around 1.0950 (100% expansion) to 1.0980 (78.6% retracement).

For more in-depth analysis, check out the 4Q 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.