March High on Radar as RSI Sits in Overbought Zone

EUR/USD Rate Talking Points

EUR/USDis more than 1.0% higher from the start of the year after marking the longest stretch of gains for 2020, and the exchange rate may attempt to test the March high (1.1495) as the Relative Strength Index (RSI) sits in overbought territory.

EUR/USD Outlook: March High on Radar as RSI Sits in Overbought Zone

The recent pullback in EUR/USD was short lived, with the exchange rate trading near the monthly high (1.1384) as the European Central Bank (ECB) keeps Euro Area interest rates on hold at the June meeting.

It seems as though the ECB will rely on its balance sheet to support the monetary union as the central bank expands the Pandemic Emergency Purchase Programme (PEPP) by EUR 600B to EUR 1.350 trillion, with the deadline for the non-standard tool being extended until at least the end of June 2021 as “the Governing Council remains fully committed to doing everything necessary within its mandate to support all citizens of the Euro Area through this extremely challenging time.”

It remains to be seen if the ECB will retain a proactive approach in combating the economic shock from COVID-19 as the central bank warns that “the improvement has so far been tepid compared with the speed at which the indicators plummeted in the preceding two months,” and the Governing Council may put pressure on fiscal authorities to act as President Christine Lagarde argues that “the EU budget can play a key role in mobilising the necessary resources and putting them to productive use.

In turn, the ECB may revert to a wait-and-see approach after expanding the scope of the PEPP, and President Lagarde and Co. may endorse a less dovish forward guidance at the next meeting on July 16 as the central bank insists that the “crisis-related measures are temporary, targeted and proportionate.

With that said, the ECB’s reluctance to implement lower interest rates may keep EUR/USD afloat, and the exchange rate may attempt to test the March high (1.1495) as the Relative Strength Index (RSI) sits in overbought territory.

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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 may attempt to test the March high (1.1495) after breaking out of the April range as the Relative Strength Index (RSI) sits in overbought territory.
  • Need a break/close above the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region to open up the Fibonacci overlap around 1.1430 (23.6% expansion) to 1.1450 (50% retracement), with the next area of interest coming in around 1.1510 (38.2% expansion) to 1.1520 (23.6% expansion), which largely coincides with the March high (1.1495).

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— Written by David Song, Currency Strategist

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