EURUSD Fails to Test 2019 Low, RSI Flashes Bullish Signal After ECB

EUR/USD Rate Talking Points

EURUSD fails to test the 2019-low (1.0926) even though the European Central Bank (ECB) unveils a slew of new measures to insulate the monetary union, and recent price action foreshadows a larger rebound in the exchange rate as the Relative Strength Index (RSI) breaks out of the bearish formation carried over from June.

EURUSD Fails to Test 2019 Low, RSI Flashes Bullish Signal After ECB

The initial reaction to the ECB meeting was short-lived, with EURUSD tagging a fresh September-high (1.1087), and the break of the monthly opening range may foster a larger recover in the exchange rate even though the Governing Council continues to endorse a dovish forward guidance for monetary policy.

The fresh round of Targeted Long-Term Refinance Operations (TLTRO) along with the EUR 20B/month in asset purchases should help to mitigate the downside risks surrounding the monetary union, but the ECB may continue to venture into uncharted territory as the Governing Council insists that that Euro area interests rates are expected to “remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2%.”

Nevertheless, the new batch of non-standard measures is likely to push the ECB to the sidelines as President Mario Draghi departs from the central bank at the end of October, and the Governing Council may largely endorse a wait-and-see approach at the next meeting on October 24 as “underlying inflation is expected to increase, supported by our monetary policy measures, the ongoing economic expansion and robust wage growth.

Image of Fed Fund futures

With that said, attention now turns to the Federal Open Market Committee (FOMC) interest rate decision on September 18 as Fed Fund futures continue to reflect overwhelming expectations for a 25bp reduction, and it remains to be seen if Chairman Jerome Powell and Co. will embark on a rate easing cycle as President Donald Trumpargues that the “the Federal Reserve should get our interest rates down to zero or less.”

In turn, back-to-back Fed rate cuts along with a dovish forward guidance may keep EURUSD afloat, with recent price action foreshadowing a larger rebound as the exchange rate breaks out of the monthly opening range.

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EUR/USD Rate Daily Chart

Image of eurusd daily chart

Source: Trading View

  • Keep in mind, the broader outlook for EURUSD is tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with the 1.1100 (78.6% expansion) handle no longer offering support.
  • However, recent developments in the Relative Strength Index (RSI) point to a larger rebound in the exchange rate as the oscillator breaks out of the downward ward trend carried over June.
  • In turn, the failed attempt to test the 2019-low (1.0926) may open up the topside targets as EURUSD tags a fresh monthly-high (1.1087), but need a break/close above the 1.1100 (78.6% expansion) handle to bring the 1.1140 (78.6% expansion) region on the radar.
  • Next area of interest comes in around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) followed by the Fibonacci overlap around 1.1270 (50% expansion) to 1.1290 (61.8% expansion).

For more in-depth analysis, check out the 3Q 2019 Forecast for Euro

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.