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EUR/USD Levels to Watch as Bull Flag Formation Takes Shape

EUR/USD Levels to Watch as Bull Flag Formation Takes Shape

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USDstruggles to extend the series of higher highs and lows from earlier this week amid concerns surrounding the EU-US trade truce, but a bull flag formation may unfold over the coming days as the Relative Strength Index (RSI) preserves the bullish trend from March.

EUR/USD Levels to Watch as Bull Flag Formation Takes Shape

EUR/USD pulls back from the weekly high (1.1349) as European Commissioner for TradePhil Hogan reveals that the Trump administration has “stepped back” from negotiations, with the official emphasizing that “we must acknowledge that the U.S. is now in a pre-election phase” during a conference with EU trade officials.

The renewed threat of an EU-US trade war may put pressure on the European Central Bank (ECB) to further support the monetary union as Chief EconomistPhilip Lane warns that the economic shock from COVID-19 “has been so large that overall activity will remain far below the pre-crisis level and the scale of the initial rebound in these weeks will not necessarily be a good guide to the speed and robustness of the recovery.”

Lane states that the initial recoveryprocess “is expected to be quite gradual,” with the Euro Area expected to return to pre-pandemic conditions “at the end of 2022,” and points out that “policy measures that operate primarily through the risk-free curve – like rate cuts – are unlikely to be as effective at the current juncture as they are in non-stressed conditions.”

In turn, Lane argues that the “evidence tilts the balance towards asset purchases as the more efficient tool in current circumstances,” and the ECB may utilize its balance sheet throughout 2020 as the central bank rules out a V-shape recovery.

It remains to be seen if the ECB will deploy more unconventional tools over the coming months amid the efforts to pass the COVID-19 recovery fund, with European Council President Charles Michel vowing to ‘start real negotiations with the member states, and will convene an in-person summit, around mid-July in Brussels.’

In turn, the ECB may merely attempt to buy time at the next meeting on July 16 even though the Governing Council stands ready to “adjust all of its instruments,” and the reluctance to implement lower interest rates may keep EUR/USD afloat as President Christine Lagarde and Co. appear to be on track to retain the current policy in the second half of the year.

With that said, EUR/USD may stage another attempt to test the March high (1.1495) as the exchange rate reverse ahead of the monthly low (1.1101), and a bull flag formation may unfold over the coming days as the Relative Strength Index (RSI) preserves the bullish formation from March.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range was 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.
  • The opening range for 2020 showed a similar scenario as EUR/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first trading day of the month.
  • However, the opening range for March was less relevant amid the pickup in volatility, with the pullback from the yearly high (1.1495) producing a break of the February low (1.0778) as the exchange rate slipped to a fresh 2020 low (1.0636).
  • Nevertheless, EUR/USD appeared to be on track to test the March high (1.1495) after breaking out of the April range, but the exchange rate struggles to retain the advance from the start of the month amid the failed attempt to close above the Fibonacci overlap around 1.1390 (61.8% retracement) to 1.1400 (50% expansion).
  • It remains to be seen if a bull flag formation will unfold over the coming days as the Relative Strength Index (RSI) bounces from trendline support to preserve the bullish trend from May, while a ‘golden cross’ formation appears to be taking shape as the 50-Day SMA (1.1029) is on the cusp of crossing above the 200-Day SMA (1.1031).
  • Lack of momentum to close above the 1.1340 (38.2% expansion) hurdle undermines the scope for a continuation pattern as EUR/USD slips below the 1.1270 (50% expansion) to 1.1290 (61.8% expansion) region, with the exchange rate coming up against the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% expansion).
  • Need a close above 1.1340 along with an extension of the bullish RSI formation to bring the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region on the radar, with the next area of interest coming in around 1.1430 (23.6% expansion) to 1.1450 (50% retracement), which largely lines up with the monthly high (1.1423).
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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.