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EUR/USD Analysis: RSI Holds in Overbought Zone Ahead of ECB Meeting

EUR/USD Analysis: RSI Holds in Overbought Zone Ahead of ECB Meeting

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD appears to be stuck in a narrow range ahead of the European Central Bank’s (ECB) last meeting for 2020, but the technical outlook remains constructive as the Relative Strength Index (RSI) continues to track the upward trend established in November and holds in overbought territory.

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EUR/USD Analysis: RSI Holds in Overbought Zone Ahead of ECB Meeting

EUR/USD may consolidate ahead of the ECB interest rate decision on December 10 as “members widely agreed that, given the sharper slowdown in growth momentum and the weakening of underlying inflation dynamics compared with what had previously been expected, as well as the deterioration in the balance of risks, it would be warranted to recalibrate the monetary policy instruments in December.

Image of DailyFX economic calendar for euro area

The account of the October meeting revealed that “there was wide agreement on the need to signal the necessity of recalibrating the ECB’s monetary policy instruments at the December monetary policy meeting,” with officials going onto say that the Governing Council stood ready to act with all the flexibility that was embodied in its pandemic emergency monetary policy tools, while also stressing its determination to act and signalling its willingness to adjust all instruments, if needed.

It remains to be seen if the ECB will take additional steps to support the Euro Area as President Christine Lagarde and Co. insist that “the Governing Council should not pre-commit itself to specific policy actions, and it seems as though the central bank is in no rush to deploy more unconventional measures as “the existing monetary policy instruments were viewed as effective.”

In turn, the ECB may recalibrate its current tools ahead of 2021 as the central bank relies on its balance sheet to combat the economic shock from COVID-19, and key market trends may carry into the year ahead as the US Dollar continues to reflect an inverse relationship with investor confidence.

Image of IG Client Sentiment for EUR/USD rate

At the same time, the tilt in retail sentiment looks poised to persist as the crowding behavior from earlier this year resurfaces, with the IG Client Sentiment report showing 30.60% of traders are net-long EUR/USD as the ratio of traders short to long stands at 2.27 to 1.

The number of traders net-long is 13.26% higher than yesterday and 19.67% higher from last week, while the number of traders net-short is 2.81% higher than yesterday and 1.02% lower from last week. The rise in net-long position comes as EUR/USD trades in a narrow range ahead of the ECB meeting, but the minor adjustment in short-interest has done little to alleviate the tilt in retail sentiment as 30.53% of traders were net-long the pair at the next of last week.

With that said, the consolidation from the September high (1.2011) appears to have been an exhaustion in the bullish price action rather than a change in trendas the crowding behavior in EUR/USD resurfaces, and the technical outlook remains constructive as the Relative Strength Index (RSI) continues to track the upward trend established in November and sits in overbought territory.

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 (1.1835) crossed above the 200-Day SMA (1.1442), with both moving averages tracking a positive slope ahead of 2021.
  • The correction from the September high (1.2011) proved to be an exhaustion in the bullish price action rather than a change in trend following the string of failed attempts to close below the 1.1600 (61.8% expansion) to 1.1640 (23.6% expansion) region, with the Relative Strength Index (RSI) highlighting a similar dynamic as it broke out of the downward trend carried over from the end of July to recover from its lowest readings since March.
  • The break/close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region has pushed EUR/USD to a fresh yearly high (1.2178) in December, with the move above the 1.2080 (78.6% retracement) to 1.2140 (50% retracement) area opening up the Fibonacci overlap around 1.2220 (50% retracement) to 1.2270 (161.8% expansion).
  • At the same time, recent developments in the RSI suggest the bullish momentum will continue to gather pace as it holds above 70 for the first time since August, with the upward trend along with the ongoing extreme reading in the oscillator likely to be accompanied by a further appreciation in EUR/USD like the behavior seen earlier this year.

--- 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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