Euro Forecast: EUR/USD Pullback Triggers RSI Sell Signal

Euro Outlook: EUR/USD

EUR/USD struggles to hold its ground after marking an eight-day rally for the first time since June 2020, with the Relative Strength Index (RSI) indicating a textbook sell-signal as it falls below 70.

Euro Forecast: EUR/USD Pullback Triggers RSI Sell Signal

The recent rally in EUR/USD looks a bit different from the price action from earlier this year as it triggered an overbought RSI reading for the first time in 2023, and the Euro may continue to outperform against its US counterpart as the European Central Bank (ECB) warns that ‘a decline in underlying inflation would not be sufficient to ensure that inflation returned to the 2% target.’

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The account of the ECB’s June meeting suggests the Governing Council will pursue a more restrictive policy as ‘inflation was still projected to remain too high for too long,’ and it seems as though President Christine Lagarde and Co. will deliver another 25bp rate-hike at the next meeting on July 27 as ‘it was seen as essential to communicate that monetary policy had still more ground to cover to bring inflation back to target in a timely manner.’

Until then, EUR/USD may consolidate as the RSI falls back from overbought territory, and it remains to be seen if the Federal Reserve will strike a similar tone amid speculation for a looming change in regime.

Source: CME

According to the CME FedWatch Tool, market participants are pricing a greater than 70% probability of seeing a terminal rate of 5.25% to 5.50% in 2023, and a dovish Fed rate-hike may produce headwinds for the Greenback as the Federal Open Market Committee (FOMC) reaches the end of its hiking-cycle.

However, the FOMC may keep the door open to implement higher interest rates as Governor Christopher Waller points out that ‘the Summary of Economic Projections (SEP) signaled two additional rate hikes by the end of this year,’ and EUR/USD may face headwinds ahead of the ECB meeting if the Fed offers a hawkish forward guidance for monetary policy.

With that said, the Fed and ECB rate decisions on tap for next week are likely to influence the near-term outlook for EUR/USD as both central banks are expected to further combat inflation, but the recent pullback in the exchange rate as triggered a textbook RSI sell-signal as the oscillator falls below 70.

Euro Price Chart – EUR/USD Daily

Chart Prepared by David Song, Strategist; EUR/USD on TradingView

• EUR/USD cleared the April high (1.1096) last week as it registered an eight-day rally, with the Relative Strength Index (RSI) pushing into overbought territory for the first time in 2023 as the exchange rate traded to a fresh yearly high (1.1276).
• However, a textbook RSI sell signal appears to be unfolding following the failed attempt to break/close above the 1.1270 (50% Fibonacci extension) to 1.1280 (61.8% Fibonacci retracement) region as the oscillator pushes below 70.
• Will keep a close eye on the former-resistance zone around 1.1070 (23.6% Fibonacci retracement) to 1.1090 (38.2% Fibonacci extension) as it encompasses the April high (1.1096), but failure to respond to the key pivot may open up the 1.0880 (23.6% Fibonacci extension) to 1.0940 (50% Fibonacci retracement), which lines up with the 50-Day SMA (1.0883).

Additional Market Outlooks

Australian Dollar Outlook: AUD/USD Rally Stalls Ahead of June High

British Pound Forecast: GBP/USD Bull Flag Formation Unfolds

--- Written by David Song, Strategist

Follow on Twitter at @DavidJSong