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EUR/USD to Face Larger Pullback as RSI Falls Back from Overbought Zone

EUR/USD Rate Talking Points

EUR/USD consolidates as the European Central Bank (ECB) comes under pressure to combat COVID-19, and the recent appreciation in the exchange rate appears to have stalled ahead of the yearly high (1.1222) as the Relative Strength Index (RSI) falls back from overbought territory.

EUR/USD to Face Larger Pullback as RSI Falls Back from Overbought Zone

EUR/USD appears to be stuck in a narrow range even though the Federal Reserve delivers an emergency 50bp rate cut ahead of its interest rate decision on March 18, and the Euro may struggle to hold its ground ahead of the ECB meeting on March 12 as President Christine Lagarde insists that the Governing Council stands “ready to take appropriate and targeted measures” to combat the coronavirus.

The comments have spurred speculation for lower interest rates even though the ECB expands its balance sheet by EUR 20B/month, and it remains to be seen if the Governing Council will venture into uncharted territory as the central bank remains reluctant to push the main refinance rate, the benchmark for borrowing costs, into negative territory.

Image of ECB interest rate decisions

In turn, the ECB may attempt to buy time as the central bank conducts a strategic review for the first time since 2003, and the Governing Council may call upon European lawmakers to deliver a fiscal stimulus program as the central bank relies on its non-standard measures to support the monetary union.

With that said, more of the same from President Lagarde and Co. may trigger a mixed reaction in the Euro as the coronavirus raises the risk for a recession, but an ECB rate cut may undermine the recent rally in EUR/USD as the central bank tests the limits of monetary policy.

Until then, EUR/USD may continue to consolidate as the advance from the February low (1.0778) fails to spur a test of the yearly high (1.1222), with the Relative Strength Index (RSI) highlighting a similar dynamic as the oscillator falls back from overbought territory.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with the high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
  • The opening range for 2020 showed a similar scenario as EUR/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first trading day of the month.
  • With that in mind, the opening range is in focus for March, but the recent recovery in EUR/USD appears to be sputtering ahead of the 2020 high (1.1222) as the exchange rate struggles to extend the series of higher highs and lows from the yearly low (1.0778).
  • The Relative Strength Index (RSI) highlights a similar dynamic as the oscillator falls back from overbought territory after briefly trading above 70 earlier this week.
  • The failed attempt to break/close above the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) has pushed EUR/USD back towards the 1.1140 (78.6% expansion) region, with the next area of interest coming in around the 1.1100 (78.6% expansion) handle.
  • Need a move below 1.1040 (61.8% expansion) to open up the overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement), with the next area of interest coming in around 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement).
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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong