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EUR/USD Rate Forecast: RSI Indicator Shows Textbook Sell Signal

EUR/USD Rate Talking Points

EUR/USD pulls back from the 2020 high (1.1916) following the US Non-Farm Payrolls (NFP) report, while the Relative Strength Index (RSI) shows a textbook sell-signal as the indicator falls back from overbought territory and slips below 70.

EUR/USD Rate Forecast: RSI Indicator Shows Textbook Sell Signal

EUR/USD showed a kneejerk reaction to the 1.763 million rise in NFP as the initial spike from the 1.1800 handle quickly unraveled, with the exchange rate initiating a series of lower highs and lows as it gives back the advance from last week’s low (1.1696).

In turn, EUR/USD may continue to give back the gains from the first week of August as the RSI shows a textbook sell signal, and the indicator may reflect a potential shift in market behavior if it snaps the upward trend established in March.

Until then, current market conditions may keep EUR/USD afloat as the crowding behavior in the US Dollar carries into August, and it remains to be seen if the ongoing improvement in the US labor market will influence the monetary policy outlook as the Federal Reserve appears to be on track to utilize its lending facilities along with its asset purchases throughout the remainder of the year.

Image of IG Client Sentiment for EUR/USD rate

Nevertheless, the IG Client Sentiment report shows retail traders have been net-short EUR/USD since mid-May, with the latest update showing 33.80% of traders net-long the pair as the ratio of traders short to long stands at 1.96 to 1.The number of traders net-long is 5.78% higher than yesterday and 11.02% higher from last week, while the number of traders net-short is 1.54% higher than yesterday and 11.33% higher from last week.

The rise in net-long interest comes as EUR/USD trades to a fresh 2020 high (1.1916) in August, while the increase in net-short positions suggest the crowding behavior in the Greenback will persist even though the DXY Index trades to fresh multi-year lows for the second consecutive week.

With that said, current market conditions may keep EUR/USD afloat, and the textbook sell signal in the RSI could be indicative of a potential exhaustion in the bullish behavior rather than a change in trend as the oscillator retains the upward trend established in March.

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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 (1.1425) crossed above the 200-Day SMA (1.1108), 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 ahead of the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region as the RSI slips below 70 and shows a textbook sell signal, and the indicator may reflect a potential shift in market behavior if it snaps the upward trend established in March.
  • Lack of momentum to hold above the Fibonacci overlap around 1.1810 (61.8% retracement) to 1.1850 (100% expansion) may fuel the recent series of lower highs and lows in EUR/USD, with a break/close below the 1.1670 (50% retracement) to 1.1710 (61.8% retracement) area bringing the 1.1640 (23.6% expansion) region on the radar.
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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong