EUR/USD Rate Takes Out August Low as RSI Tracks Downward Trend

EUR/USD Rate Talking Points

EUR/USD takes out the August low (1.1696) as it extends the series of lower highs and lows from earlier this week, and the exchange rate may face a further decline over the coming days as the Relative Strength Index (RSI) continues to track the downward trend carried over from the end of July.

EUR/USD Rate Takes Out August Low as RSI Tracks Downward Trend

EUR/USD trades to a fresh monthly low (1.1651) as the congressional testimony from Chairman Jerome Powell indicates the Federal Reserve will rely on its current tools to support the US economy, while a growing number of European Central Bank (ECB) officials appear to be jawboning the Euro as the Governing Council struggles to achieve its one and only mandate for price stability.

During an interview with Bloomberg News, ECB board member Yves Mersch warned that “the recent movement in the exchange rate has had statistical effects on some of our measures of inflation and production,” with the official going onto say that the Governing Council “will monitor very closely the effects of exchange rate developments on our efforts to attain our objective of price stability.”

However, it seems unlikely the ECB will intervene in foreign exchange markets as ECB Vice-President Luis de Guindos warns that “it would be suicidal to enter into any sort of dispute about exchange rates,” and it remains to be seen if Governing Council will implement more non-standard measures to foster a stronger recovery as “the ECB stands ready to adjust all of its instruments as appropriate.

In turn, the ECB may stick to the sideline at the next meeting on October 29 as President Christine Lagarde and Co. emphasize that the EUR 1.350 trillion envelope for the pandemic emergency purchase programme (PEPP) “should be considered a ceiling rather than a target, and swings in investor confidence may sway EUR/USD over the coming days as the appreciation in the US Dollar coincides with the decline in global equity prices.

Nevertheless, the tilt in retail sentiment looks poised to persist even though the ECB continues to endorse a dovish forward guidance for monetary policy as traders have been net-short EUR/USD since mid-May.

The IG Client Sentiment report shows 39.73% of traders are net-long with the ratio of traders short to long at 1.52 to 1. The number of traders net-long is 9.68% lower than yesterday and 13.30% higher from last week, while the number of traders net-short is 10.13% higher than yesterday and 5.23% higher from last week.

The rise in net-long position has helped to alleviate the tilted in retail sentiment as only 37.98% of traders were net-long EUR/USD last week, but the rise in net-short interest suggests the crowding behavior will carry into the end of the month even though the Fed’s balance sheet holds above $7 trillion in September.

With that said, the pullback from the yearly high (1.2011) may prove to be an exhaustion in the bullish price action rather than a change in trend amid the ongoing skew in retail sentiment, but EUR/USD may face a further decline over the coming days as the Relative Strength Index (RSI) continues to track the downward trend carried over from the end of July.

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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 (1.1780) crossed above the 200-Day SMA (1.1232), 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 stalled following the failed attempt to close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region, with the RSI highlighting a similar dynamic as it slipped below 70 to ultimately break trendline support.
  • A similar scenario has materialized in September even though EUR/USD traded to a fresh yearly high (1.2011) at the start of the month, with the exchange rate taking out the August low (1.1696) after staging another failed attempt to close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region.
  • EUR/USD may face a larger correction as the RSI continues to track the downward trend carried over from the end of July and approaches oversold territory, with a break below 30 likely to be accompanied by a further decline in the exchange rate like the behavior seen in February.
  • Lack of momentum to hold above the Fibonacci overlap around 1.1670 (50% retracement) to 1.1710 (61.8% retracement) brings the 1.1600 (61.8% expansion) to 1.1640 (23.6% expansion) region on the radar, with the next area of interest coming in around 1.1510 (38.2% expansion) to 1.1520 (23.6% expansion).

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— Written by David Song, Currency Strategist

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