EUR/USD outlook clouded by downward trend in RSI

EUR/USD Outlook

EUR/USD snaps the series of lower highs and lows from the start of the week amid an unexpected downtick in the US Consumer Price index (CPI), but the Relative Strength Index (RSI) may continue to diverge with price as the oscillator develops a downward trend.

EUR/USD outlook clouded by downward trend in RSI

EUR/USD appeared to be threatening the opening range for May it registered a fresh monthly low (1.0941), but the recent rebound in the exchange rate may lead to further attempts to test the April high (1.1096) if it responds to the positive slope in the 50-Day SMA (1.0862).

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FOREX.com Economic Calendar

Looking ahead, data prints coming out of the US may continue to sway EUR/USD as the Producer Price Index (PPI) is anticipated to show a further decline in factory-gate prices, with the core rate seen narrowing to 3.3% in April from 3.4% per annum the month prior.

At the same time, Initial Jobless Claims are projected to increase to 245K from 242K in the week ending April 29, and signs of easing inflation along with a rise in claims for unemployment benefits may push the Federal Reserve to the sidelines as the central bank warns that ‘the economy is likely to face further headwinds from tighter credit conditions.’

Source: CME

According to the CME FedWatch Tool, market participants are pricing a greater than 90% probability for the Federal Open Market Committee (FOMC) to keep the benchmark interest rate within the current threshold of 5.00% to 5.25%, and it remains to be seen if Chairman Jerome Powell and Co. will further adjust the forward guidance on June 14 as the central bank is slated to release the updated Summary of Economic Projections (SEP).

Until then, speculation for a looming change in regime may produce headwinds for the Greenback as the FOMC appears to be at the end of its hiking-cycle, and the Euro may continue to outperform its US counterpart in 2023 as the European Central Bank (ECB) pledges to ‘ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our two per cent medium-term target.’

With that said, the recent weakness in EUR/USD may end up being temporary as the ECB keeps the door open to further combat inflation, but the Relative Strength Index (RSI) may continue to diverge with price as the oscillator develops a downward trend.

Euro Price Chart – EUR/USD Daily

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

• Unlike the price action from April, EUR/USD struggles to defend the opening range in May following the failed attempt to clear the yearly high (1.1096), while the Relative Strength Index (RSI) reflects a downward trend as it deviates with price.
• A break/close below the 1.0880 (23.6% Fibonacci extension) to 1.0940 (50% Fibonacci retracement) region may push EUR/USD towards the April low (1.0788), with the next area of interest coming in around 1.0610 (38.2% Fibonacci retracement).
• Nevertheless, EUR/USD may respond to the positive slope in the 50-Day SMA (1.0861) as it holds above the 1.0880 (23.6% Fibonacci extension) to 1.0940 (50% Fibonacci retracement) region but need a close above the 1.1070 (23.6% Fibonacci retracement) to 1.1090 (38.2% Fibonacci extension) area along a break above the April high (1.1096) to bring the March 2022 high (1.1185) on the radar.

Additional Resources:

AUD/USD rate rally stalls ahead of April high

USD/CAD reverses ahead of April high with monthly open in focus

--- Written by David Song, Strategist