EUR/USD Bull Flag Still on Radar as RSI Preserves Bullish Trend

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EUR/USD Rate Talking Points

EUR/USD breaks out of a narrow range to trade to a fresh monthly high (1.1345), 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 Bull Flag Still on Radar as RSI Preserves Bullish Trend

EUR/USD appears to be on track to test the June high (1.1423) following the limited reaction to the US Non-Farm Payrolls (NFP) report as the US Dollar depreciates against all of its major counterparts since the start of July.

It seems as though the weakness in the greenback will persist as the IG Client Sentiment report continues to reflect crowding behavior in the currency market, and EUR/USD may stay afloat ahead of the European Central Bank (ECB) meeting on July 16 as the Governing Council appears to be on track to retain the current policy.

Recent remarks from ECB Chief Economist Philip Lane suggest the central bank will move to the sidelines after expanding the Pandemic Emergency Purchase Programme (PEPP) by EUR600 billion in June as the Euro Area is in “the second stage of recovery.”

The ECB appears to be on track to carry out a wait-and-see approach even though the central bank stand ready to “adjust all of its instruments” 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.”

In turn, President Christine Lagarde and Co. may gradually alter the forward guidance over the coming months 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 appears to be on track to retain the current policy, 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 (1.1097) crossing above the 200-Day SMA (1.1042) ahead of the second half of the year.
  • At the same time, the Relative Strength Index (RSI) appears to be validating 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 break/close 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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