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EUR/USD Forecast: August Low Remains on Radar Following Fed Symposium

EUR/USD Forecast: August Low Remains on Radar Following Fed Symposium

David Song,
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EUR/USD Rate Talking Points

EUR/USD continues to track the monthly range following the kneejerk reaction to the Federal Reserve Economic Symposium, but the August low (1.1696) remains on the radar ahead of September as the Relative Strength Index (RSI) retains the downward trend established earlier this month.

EUR/USD Forecast: August Low Remains on Radar Following Fed Symposium

The spike in EUR/USD volatility was short-lived as the update to the Statement on Longer-Run Goals and Monetary Policy Strategy showed small changes in the wording to the Fed’s mandate, with Chairman Jerome Powell insisting that “a longer-run inflation rate of 2 percent is most consistent with our mandate to promote both maximum employment and price stability.”

The prepared remarks by Chairman Powell states that the adjustments to the framework “reflects our view that a robust job market can be sustained without causing an outbreak of inflation,” with the central bank head going onto say that the Federal Open Market Committee (FOMC) will “seek to achieve inflation that averages 2 percent over time.”

In turn, Chairman Powell argues that “when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time,” and it seems as though the FOMC is in no rush to scale back its emergency measures even though the committee discusses an outcome-based approach versus a calendar-based forward guidance for monetary policy.

The developments coming out of Fed symposium suggest the FOMC will retain the current policy at the next interest rate decision on September 16, and current market themes may keep EUR/USD afloat as Chairman Powell and Co. vow to “increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace.”

Nevertheless, the crowding behavior in the US Dollar looks poised to persist in September as retail traders have been net-short EUR/USD since mid-May, with the IG Client Sentiment report showing only 37.23% of traders net-long the pair as the ratio of traders short to long stands at 1.69 to 1.

Image of IG Client Sentiment for EUR/USD rate

The latest update shows the number of traders net-long EUR/USD is 13.37% lower than yesterday and 4.75% lower from last week, while the number of traders net-short is 12.33% lower than yesterday and 18.35% lower from last week.

As a result, EUR/USD open interest is 13.76% lower from last week, but the tilt in retail sentiment may carry into the month ahead as the Federal Reserve shows little intentions of altering the path for monetary policy ahead of the US election in November.

With that said, current market conditions may keep EUR/USD afloat especially as the account of the European Central Bank (ECB) meeting highlights that the EUR 1.350 trillion envelope for the pandemic emergency purchase programme (PEPP) “should be considered a ceiling rather than a target,” but the pullback from the yearly high (1.1966) may turn into a more pronounced correction as the as the Relative Strength Index (RSI) retains the downward trend established earlier this month.

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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 (1.1579) crossed above the 200-Day SMA (1.1161), 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.
  • However, the EUR/USD rally appears to have stalled following the failed attempt to break/close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region, with the RSI highlighting a similar dynamic as it slipped below 70 to flash a textbook sell signal.
  • Recent developments in the RSI warn of a potential shift in EUR/USD behavior as the indicator snaps the bullish formation from earlier, with the exchange rate struggling to push back above the Fibonacci overlap around 1.1810 (61.8% retracement) to 1.1850 (100% expansion) as the oscillator establishes a downward trend in August.
  • In turn, the 1.1670 (50% retracement) to 1.1710 (61.8% retracement) region remains on the radar as it lines up with the August low (1.1696), but a break of the monthly range opens up the 1.1600 (61.8% expansion) to 1.1640 (23.6% expansion) area, with the next region of interest coming in around 1.1510 (38.2% expansion) to 1.1520 (23.6% expansion).
  • Looking ahead, will need to see the RSI break out of the newly established downward trend to bring the topside targets back on the radar for EUR/USD.
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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.