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EUR/USD Rally Continues to Be Accompanied by Extreme RSI Reading

EUR/USD Rally Continues to Be Accompanied by Extreme RSI Reading

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD trades to fresh 2020 high (1.1916) ahead of the update to the US Non-Farm Payrolls (NFP) report, and the extreme reading in the Relative Strength Index (RSI) is likely to be accompanied by a further appreciation in the exchange rate like the behavior seen in June.

EUR/USD Rally Continues to Be Accompanied by Extreme RSI Reading

EUR/USD extends the series of higher highs and lows from earlier this week as RSI sits in overbought territory, and it remains to be seen if the update to the NFP report will influence the exchange rate as the US economy is anticipated to add nearly 1.6 million jobs in July.

Image of DailyFX economic calendar for US

At the same time, the Unemployment Rate is expected to narrow to 10.5% from 11.1% the month prior, and the ongoing improvement in the labor market may trigger a bullish reaction in the US Dollar as it put pressure on the Federal Reserve to scale back its emergency measures.

However, it seems as though the Federal Open Market Committee (FOMC) is in no rush to alter the course for monetary policy as the central bank extends its lending facilities and pledges to “increase our holdings of Treasury and agency mortgage-backed securities at least at the current pace.

In turn, the FOMC may stick to the status quo at the next interest rate decision on September 16 as the committee warns that “it will take a while to get back to the levels of economic activity and employment that prevailed at the beginning of this year,” and more of the same from Chairman Jerome Powell and Co. may continue to drag on the US Dollar as the central bank remains “committed to using our full range of tools to support the economy in this challenging time.

Until then, current market conditions may keep EUR/USD afloat as the RSI holds above 70, while the crowding behavior in the Greenback carries into August even though the DXY indexplummets for sixth consecutive weeks.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows retail traders have been net-short EUR/USD since mid-May, with the latest update showing 32.19% of traders currently net-long the pair as the ratio of traders short to long stands at 2.11 to 1.The number of traders net-long is 10.06% higher than yesterday and 4.05% lower from last week, while the number of traders net-short is 7.24% lower than yesterday and 7.77% lower from last week.

Recent price action in EUR/USD appears to be fueling net-long interest ahead of the NFP report as it extends the series of higher highs and lows from earlier this week, while the decline in net-short positions suggests stop-loss orders are being triggered as the exchange rate trades to fresh 2020 high (1.1916).

Looking ahead, a further shift in EUR/USD positioning may fuel the rebound in the IG Client Sentiment index as it returns from the extreme reading in June, but current market conditions may keep the exchange rate afloat as the RSI holds above 70, while the crowding behavior in the US Dollar persists.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, a ‘golden cross’ materialized in EUR/USD towards the end of June as the 50-Day SMA (1.1414) crossed above the 200-Day SMA (1.1105), with the moving averages extending the positive slopes into the second half of the year.
  • At the same time, a 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 Relative Strength Index (RSI) helping to validate the continuation pattern as the oscillator bounced along trendline support to preserve the upward trend from March.
  • Will keep a close eye on the RSI as it sits in overbought territory for the third time in 2020, with the bullish price action in EUR/USD likely to persist as long as the indicator holds above 70 amid the behavior seen in June.
  • EUR/USD has cleared the September 2018 high (1.1815) as it extends the series of higher highs and lows from earlier this week, with the break/close above the Fibonacci overlap around 1.1810 (61.8% retracement) to 1.1850 (100% expansion) bringing the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region on the radar.
  • It remains to be seen if/how EUR/USD will respond to the psychologically important 1.2000 handle, with the next topside hurdle coming in around 1.2080 (78.6% retracement) to 1.2140 (50% retracement).
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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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