EUR/USD Rate Eyes June High as Bullish RSI Trend Remains Intact

EUR/USD Rate Talking Points

EUR/USD extends the advance from earlier this week to trade to a fresh monthly high (1.1352), and a bull flag formation may unfold over the coming days as the Relative Strength Index (RSI) continues to track the bullish trend from earlier this year.

EUR/USD Rate Eyes June High as Bullish RSI Trend Remains Intact

EUR/USD approaches the June high (1.1423) even though the European Commission downgrades the economic outlook for the Euro Area, with the group now forecasting an 8.7% contraction in 2020 versus an initial forecast for a 7.7% decline.

Fears of a deeper recession may put pressure on the European Central Bank (ECB) to further support the monetary union as the Governing Council “stand ready to adjust all of its instruments,” and the central bank may endorse a dovish forward guidance throughout the second half of 2020 as ECB officials rule out a V-shape recovery.

It remains to be seen if the ECB will deploy more unconventional tools after expanding the Pandemic Emergency Purchase Programme (PEPP) by EUR600 billion in June, and the central bank may stick to the sidelines at its next interest rate decision on July 16 as Chief Economist Philip Lane emphasizes that the Euro Area is in “the second stage of recovery.”

It seems as though the ECB is on track to establish a wait-and-see approach as board member Yves Merschreveals that a COVID-19 recovery fund “would reduce the burden on monetary policy and the need for further easing of the policy stance,” with President Christine Lagarde striking a similar tone as the central bank head insists that “the real game-changer element is the recovery fund.”

In turn, the ECB may gradually soften the dovish forward guidance as European Council President Charles Michel vows to ‘start real negotiations with the member states, and will convene an in-person summit, around mid-July in Brussels,’ and a growing number of ECB officials may tame speculation for additional monetary support as “euro area activity is expected to rebound in the third quarter.”

With that said, the reluctance to implement lower interest rates may keep EUR/USD afloat as the ECB looks poised to retain the current policy in July, and the exchange rate may stage another attempt to test the March high (1.1495) as a bull flag formation takes shape, 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, the monthly opening range was 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.
  • However, the opening range for March was less relevant amid the pickup in volatility, with the pullback from the yearly high (1.1495) producing a break of the February low (1.0778) as the exchange rate slipped to a fresh 2020 low (1.0636).
  • Nevertheless, EUR/USD appeared to be on track to test the March high (1.1495) after breaking out of the April range, but the exchange rate continues to track the June range following the failed attempt to close above the Fibonacci overlap around 1.1390 (61.8% retracement) to 1.1400 (50% expansion).
  • It remains to be seen if a bull flag formation will unfold over the coming days asa ‘golden cross’ takes shape, with the 50-Day SMA (1.1113) crossing above the 200-Day SMA (1.1046) ahead of the second half of the year.
  • At the same time, recent developments in the Relative Strength Index (RSI) helps to validate the continuation patterns as the oscillator rebounds from trendline support and preserves the bullish trend from earlier this year.
  • Lack of momentum to trade below the 1.1190 (38.2% retracement) to 1.1220 (78.6% expansion) area has pushed EUR/USD back above the Fibonacci overlap around 1.1270 (50% expansion) to 1.1290 (61.8% expansion), but need a closing price above 1.1340 along with an extension of the bullish RSI formation to bring the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region on the radar.
  • Next area of interest comes in around 1.1430 (23.6% expansion) to 1.1450 (50% retracement), which largely lines up with the June high (1.1423), followed by March high (1.1495), which aligns with the overlap around 1.1510 (38.2% expansion) to 1.1520 (23.6% retracement).

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— Written by David Song, Currency Strategist

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