EUR/USD Forecast:
- USD remains under pressure as US-China tensions rise
- EUR/USD trading at key Fibonacci levels
- Will bulls be able to break through key area of resistance or is the pair overbought, as indicated by the RSI?
Bulls Look for a Break Above Key Fibonacci Level
The EU summit ended yesterday with EU leaders securing a €750 billion recovery fund, aimed at supporting European economies to recover from the effects of the coronavirus pandemic. As a result, inflows into the euro have accelerated, while growing US-China tensions, combined with an increase in the number of coronavirus cases in the US, continues to add pressure to the Dollar.
The weekly chart below highlights Fibonacci levels from two major moves. The first Fibonacci retracement (pink) is taken from the January 2017 low to the February 2018 high (the medium-term move), while the second Fibonacci retracement (purple), represents the shorter-term move between the February 2018 high and the March 2020 low.
Since August 2019, the EUR/USD has been trading in a key area of confluence between the 76.4% and 61.8% retracement of the medium-term Fibonacci. This relatively tight span containing the two above-mentioned Fibonacci levels has formed clear areas of support and resistance. However, after breaking through the 61.8% level (1.11846), price action has favored the bulls, with the 50% retracement of the medium-term move now forming a level of support at 1.14407.
EUR/USD Weekly Chart
Chart created by Tammy Da Costa, IG
RSI Suggests EUR/USD May be Overbought
With Fibonacci levels holding strong, the RSI indicates that the EUR/USD may be entering into overbought territory. While the Relative Strength Index (RSI) is a technical indicator which is commonly used to measure the momentum of the trend, it is often used to determine when a financial instrument enters into periods of overbought or oversold territory.
As highlighted on the 4 hour chart below, the RSI is trading above 70, signaling that although a strong upward trend is present, the pair may be entering into overbought territory. Should the RSI cross from above the 70 line towards the downside, bears may see it as a sign that a reversal may be on the cards.
EUR/USD 4-Hour Chart
Chart prepared by Tammy Da Costa, IG
Looking Ahead
As price action continues to fluctuate between the short-term and medium-term Fibonacci levels, bulls continue to fight for a breakout above the 50% retracement of the shorter-term Fibonacci at 1.15990, towards the psychological level of 1.16. Should this level be broken, the upside may prevail with the 38.2% retracement of the medium-term Fibonacci providing resistance at 1.17095.
Meanwhile, bears may be looking for an opportunity of a reversal should prices fall below 1.14471, which is the 50% retracement of the medium-term move. If this level is broken, the 38.2% retracement of the shorter-term move, may be the next level of support at 1.13724.
Client Sentiment
According to client sentiment, at the time of writing, majority of retail traders are showing a bearing bias towards EUR/USD, with 71% of traders holding short positions. We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests that the EUR/USD may rise.
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--- Written by Tammy DaCosta, Market Writer for DailyFX.com
Contact and follow Tammy on Twitter: @Tams707
