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EUR/USD Forecast: 2020 High on Radar as Bull Flag Pattern Unfolds

EUR/USD Rate Talking Points

EUR/USD clears the June high (1.1423) ahead of the European Central Bank (ECB) interest rate decision, and a bull flag formation appears to be unfolding as the Relative Strength Index (RSI) continues to track the bullish trend from earlier this year.

EUR/USD Forecast: 2020 High on Radar as Bull Flag Pattern Unfolds

EUR/USD now appears to be on track to test the 2020 high (1.1495) asthe bull flag formation underscores a continuation pattern, and key developments coming out of the Euro Area may keep the exchange rate afloat as fiscal authorities convene for a special meeting between July 17-18 ‘to discuss the recovery plan to respond to the COVID-19 crisis.’

It remains to be seen if the ECB interest rate decision will influence the Euro exchange rate ahead of the EU meeting as the central bank is expected to move to the sidelines after expanding the Pandemic Emergency Purchase Programme (PEPP) by EUR600 billion in June.

The push for another round of fiscal stimulus may encourage the ECB to establish a wait-and-see approach even though the Governing Council stands “ready to adjust all of its instruments” as board member Yves Merschreveals that a European recovery fund “would reduce the burden on monetary policy and the need for further easing of the policy stance.

Image of ECB interest rates

Source: ECB

In turn, President Christine Lagarde and Co. may gradually alter the forward guidance as “euro area activity is expected to rebound in the third quarter, and the ECB may stick to its non-standard tools to support the monetary union as the central bank shows little intent of pushing the main refinance rate, the benchmark for borrowing costs, into negative territory.

With that said, the reluctance to implement lower Euro Area interest rates may keep EUR/USD afloat as the ECB moves to the sidelines, and the exchange rate may stage another attempt to test the March high (1.1495) as a bull flag appears to be unfolding, while the Relative Strength Index (RSI) continues to track the bullish trend from March.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, EUR/USD failed to test the March high (1.1495) in June amid the lack of momentum to break/close above the Fibonacci overlap around 1.1430 (23.6% expansion) to 1.1450 (50% retracement), with the Relative Strength Index (RSI) pulling back from overbought territory during the same period after triggering an extreme reading for the second time in 2020.
  • Nevertheless, a ‘golden cross’ materializing towards the end of June as the 50-Day SMA (1.1162) crossed above the 200-Day SMA (1.1055), with the RSI managing to hold trendline support to retain the bullish trend from earlier this year.
  • Will keep a close eye on the RSI as it approaches overbought territory, with another break above 70 likely to be accompanied by a further advance in EUR/USD like the behavior seen in June.
  • A bull flag formation appears to be unfolding amid failed attempt to close below the 1.1190 (38.2% retracement) to 1.1220 (78.6% expansion) region in July, with the continuation pattern bringing the 2020 high (1.1495) on the radar as EUR/USD takes out the June high (1.1423).
  • Need a closing price above the Fibonacci overlap around 1.1430 (23.6% expansion) to 1.1450 (50% retracement) to open up the March high (1.1495), which largely aligns with the 1.1510 (38.2% expansion) to 1.1520 (23.6% retracement) region.
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— Written by David Song, Currency Strategist

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