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EUR/USD Rate Trades to Fresh 2020 High Ahead of Fed Rate Decision

EUR/USD Rate Trades to Fresh 2020 High Ahead of Fed Rate Decision

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD trades to a fresh 2020 high (1.1699) ahead of the Federal Reserve interest rate decision on July 29, and current market conditions may keep the exchange rate afloat as the Relative Strength Index (RSI) sits in overbought territory.

EUR/USD Rate Trades to Fresh 2020 High Ahead of Fed Rate Decision

EUR/USD has taken out the March high (1.1495) as a bull flag formation panned out in July, with the RSI helping to validate the continuation pattern as the oscillator bounced along trendline support to preserve the upward trend from March.

In turn, EUR/USD may continue to carve a series of higher highs and lows as long as the RSI holds above 70, and the bullish price action may persist going into the Federal Open Market Committee (FOMC) meeting as the appreciation in the exchange rate continues to be accompanied by crowding behavior in the US Dollar.

Image of IG client sentiment for EUR/USD rate

The latest update to theIG Client Sentiment report shows the ratio of traders short to long is now at 2.55 to 1 as only 28.20% of traders arenet-long EUR/USD, with the crowd net-short the pair since mid-May. The number of traders net-long is 3.58% lower than yesterday and 7.52% higher from last week, while the number of traders net-short is 3.04% higher than yesterday and 8.74% lower from last week.

It seems as though the EUR/USD rally is fueling net-long interest as it clears the 2019 high (1.1570), while the decline in net-short positions suggests stop-loss orders are being triggered as the exchange rate trades to fresh yearly highs.

It remains to be seen if the crowding behavior in the US Dollar will persist as the FOMC vows to “increase its holdings of Treasury securities and agency MBS (Mortgage-Backed Security) and agency CMBS (Commercial Mortgage-Backed Security) at least at the current pace,” but current market conditions may keep EUR/USD afloat as long as the RSI sits in overbought territory and holds above 70.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, EUR/USD failed to test the March high (1.1495) in June amid the lack of momentum to break/close above the Fibonacci overlap around 1.1430 (23.6% expansion) to 1.1450 (50% retracement), with the Relative Strength Index (RSI) pulling back from overbought territory during the same period after triggering an extreme reading for the second time in 2020.
  • Nevertheless, a ‘golden cross’ materializing towards the end of June as the 50-Day SMA (1.1263) crossed above the 200-Day SMA (1.1074), with the RSI bouncing along trendline support to retain the bullish trend from earlier this year.
  • Will keep a close eye on the RSI as it triggers an overbought reading for the third time in 2020, with the bullish price action in EUR/USD like to persist as long as the indicator holds above 70 amid the behavior seen in June.
  • The bull flag formation panned out following the failed attempt to close below the 1.1190 (38.2% retracement) to 1.1220 (78.6% expansion) region in July, with the continuation pattern producing a break of the 2019 high (1.1570) as EUR/USD carves a series of higher highs and lows.
  • Need a break/close above the 1.1670 (50% retracement) to 1.1710 (61.8% retracement) region to open up the September 2018 high (1.1815), which largely lines up with the Fibonacci overlap around 1.1810 (61.8% retracement) to 1.1850 (100% expansion).

--- 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.