Rates to Watch as RSI Holds in Overbought Zone

EUR/USD Rate Talking Points

EUR/USD consolidates after clearing the September 2018 high (1.1815) at the end of July, but the Relative Strength Index (RSI) continues to sit in overbought territory, with the persistent reading above 70 indicative of a further appreciation in the exchange rate like the behavior seen in June.

EUR/USD Outlook: Rates to Watch as RSI Holds in Overbought Zone

EUR/USD initiates a series of higher highs and lows as it retraces the pullback from the 2020 high (1.1909), and current market conditions may keep the exchange rate afloat as the extreme reading in the RSI carries into August.

It remains to be seen if the RSI will continue to hold above 70 ahead of the US Non-Farm Payrolls (NFP) report as the appreciation in EUR/USD continues to be accompanied by crowding behavior in the Greenback even though the DXY index plummets for sixth consecutive weeks.

The IG Client Sentiment report reveals retail traders have been net-short EUR/USD since mid-May, with the latest update showing 35.84% of traders currently net-long the pair as the ratio of traders short to long sits at 1.79 to 1.The number of traders net-long is 12.46% higher than yesterday and 1.75% lower from last week, while the number of traders net-short is 7.09% lower than yesterday and 4.27% lower from last week.

Recent price action in EUR/USD appears to be fueling net-long interest as it initiates a series of higher highs and lows during the first week of August, while the decline in net-short positions suggests stop-loss orders are being triggered as the exchange rate retraces the pullback from the 2020 high (1.1909).

Looking ahead, a further shift in EUR/USD positioning may fuel the rebound in the IG Client Sentiment index it returns from the extreme reading in June, but current market conditions may keep the exchange rate afloat as the RSI holds above 70, while the crowding behavior in the US Dollar carries into August.

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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 (1.1382) crossed above the 200-Day SMA (1.1097), 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.
  • Will keep a close eye on the RSI as it sits in overbought territory for the third time in 2020, with the bullish price action in EUR/USD likely to persist as long as the indicator holds above 70 amid the behavior seen in June.
  • Need a closing price above the Fibonacci overlap around 1.1810 (61.8% retracement) to 1.1850 (100% expansion) to bring the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region on the radar, with the next area of interest coming in around 1.2080 (78.6% retracement) to 1.2140 (50% retracement).

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— Written by David Song, Currency Strategist

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