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EUR/USD Rally Pushes RSI Into Overbought Zone Ahead of FOMC Minutes

EUR/USD Rally Pushes RSI Into Overbought Zone Ahead of FOMC Minutes

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD trades to a fresh 2020 high (1.1966) ahead of the Federal Open Market Committee (FOMC) Minutes, and current market conditions may keep the exchange rate afloat as Relative Strength Index (RSI) pushes into overbought territory.

EUR/USD Rally Pushes RSI Into Overbought Zone Ahead of FOMC Minutes

EUR/USD is on track to mark the longest stretch of gains since 2004 after appreciating for eight consecutive weeks, and it remains to be seen if the FOMC Minutes will derail the bullish behavior as the RSI preserves the upward trend established in March and climbs above 70 for the fourth time this year.

The extreme reading in the RSI is likely to be accompanied by a further appreciation in EUR/USD amid the behavior seen in July, and more of the same from Chairman Jerome Powell and Co. may keep the exchange rate afloat as the Federal Reserve appears to be in no rush to alter the course for monetary policy.

In turn, the FOMC Minutes may highlight a dovish forward guidance as the central bank vows to “increase our holdings of Treasury and agency mortgage-backed securities at least at the current pace, and the provisions to the US Dollar liquidity swap lines unveiled in March may continue to drag on the Greenback as the arrangements “serve as an important liquidity backstop to ease strains in global funding markets.”

At the same time, it seems as though the crowding behavior in the US Dollar will persist even though the FOMC relies on its asset purchases along with its lending facilities to support the US economy as retail traders have been net-short EUR/USD since mid-May.

With that said, current market conditions may EUR/USD afloat ahead of the FOMC Minutes, and the exchange rate appears to be on track to test the May 2018 high (1.1996) as the RSI pushes into overbought territory for the fourth time in 2020.

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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 (1.1502) crossed above the 200-Day SMA (1.1134), 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 established in March.
  • Recent developments in the RSI suggest the bullish momentum will continue to gather pace over the coming days as the oscillator pushes into overbought territory for the fourth time in 2020, with the extreme reading in the indicator likely to be accompanied by a further appreciation in EUR/USD amid the behavior seen in July.
  • Need a break/close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region to bring the May 2018 high (1.1996) on the radar, with the next area of interest 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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