EUR/USD Eyes Price Gap from April 2017 as RSI Sits in Oversold Zone

EUR/USD Rate Talking Points

EUR/USD extends the decline from earlier this month as the coronavirus dampens the outlook for global growth, and the exchange rate may appears to be on track to fill the price gap from April 2017 as the Relative Strength Index (RSI) sits in oversold territory.

EUR/USD Eyes Price Gap from April 2017 as RSI Sits in Oversold Zone

EUR/USD trades to a fresh yearly low (1.0823) as European Stability Mechanism Managing Director Klaus Regling identifies the coronavirus as a downside risk to the monetary union, with the official warning that the “interruption to supply chains, the effect on trade, on tourism and confidence will spill over to the world economy.”

The threat posed by the outbreak is likely to become a growing concern for the European Central Bank (ECB) as the “risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside.”

The weakening outlook for global growth may put pressure on the ECB to further insulate the economy as the “Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.

However, the account of the first meeting for 2020 may highlight a wait-and-see approach for monetary policy as the ECB continues to expand its balance sheet by EUR 20B/month, and President Christine Lagarde and Co. appear to be in no rush to implement more non-standard measures as the central bank remains reluctant to push the main refinance rate, the benchmark for borrowing costs, into negative territory.

As a result, the ECB may retain the current policy at the next meeting on March 12, but the Governing Council may continue to endorse a dovish forward guidance as the central bank struggles to achieve its one and only mandate for price stability.

With that said, the diverging paths between the ECB and Federal Reserve may continue to drag on EUR/USD as Chairman Jerome Powell and Co. see US interest rates on hold in 2020.

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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 has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with monthly 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.
  • With that in mind, the bearish price action from the start of February may persist as EUR/USD clears the 2019 low (1.0879), while the Relative Strength Index (RSI) tracks the downward trend from earlier this year and sits in oversold territory.
  • EUR/USD may finally fill the gap from April 2017 as the break/close below the Fibonacci overlap around 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement) opens up the 1.0780 (100% expansion) region.

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— Written by David Song, Currency Strategist

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