EUR/USD Rate Selloff Pushes RSI Into Oversold Territory

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EUR/USD Rate Talking Points

EUR/USD is on track to mark a six day decline as it trades to a fresh yearly low (1.1263), and recent developments in the Relative Strength Index (RSI) raises the scope for a further depreciation in the exchange rate as the indicator crosses below 30 to push into oversold territory.

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EUR/USD Rate Selloff Pushes RSI Into Oversold Territory

EUR/USD approaches the July 2020 low (1.1185) following the bearish reaction to the better-than-expected US Retail Sales report, and the Euro may continue to underperform against its US counterpart as the European Central Bank (ECB) acknowledges that “recent strains in global supply chains and the spike in energy prices could have longer-lasting effects on inflation than expected and weigh on the economic recovery.”

The ECB’s November 2021 Financial Stability Review suggests the central bank is in no rush to remove monetary support as the report emphasizes that “the momentum of the growth has moderated to some extent recently, with the rise in energy prices and supply chain bottlenecks posing downside risks to economic growth going forward.

Nevertheless, the ECB goes onto say that “it is still likely that real GDP will surpass its pre-pandemic levels in the fourth quarter of 2021, two quarters earlier than had been expected at the start of the year,” and it remains to be seen if President Christine Lagarde and Co. will adjust the forward guidance at the next meeting on December 16 as the central bank is slated to released the updated staff projections for the Euro Area.

Until then, EUR/USD may continue face headwinds as the Federal Reserve carries out its exit strategy, but a further decline in the exchange rate is likely to fuel the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows 69.34% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 2.26 to 1.

The number of traders net-long is 2.92% lower than yesterday and 28.14% higher from last week, while the number of traders net-short is 3.93% lower than yesterday and 29.21% lower from last week. The rise in net-long interest has fueled the crowding behavior as 61.09% of traders were net-long EUR/USD last week, while the decline in net-short position comes as the exchange rate trades to a fresh yearly low (1.1263).

With that said, EUR/USD may continue to trade to fresh 2021 lows throughout the remainder of the year amid the deviating paths between the ECB and FOMC, and recent developments in the Relative Strength Index (RSI) raises the scope for a further depreciation in the exchange rate as the indicator crosses below 30 to push into oversold territory.

EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, EUR/USD sits below the 200-Day SMA (1.1866) for the first time since April as the advance from the March low (1.1704) failed to produce a test of the January high (1.2350), with the moving average establishing a negative slope as the exchange rate traded to a fresh yearly lows in October.
  • EUR/USD continues to depreciate in November, with recent developments in the Relative Strength Index (RSI)indicating a further depreciation in the exchange rate as the oscillator crosses below 30 to push into oversold territory.
  • Need a close below the 1.1290 (61.8% retracement) to 1.1310 (100% expansion) region to bring the July 2020 low (1.1185) on the radar, which largely lines up with the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.12 (20 (78.6% retracement), with the next area of interest comes in around the 1.1000 (78.6% retracement) handle.
  • However, failure to a close below the 1.1290 (61.8% retracement) to 1.1310 (100% expansion) region may generate a rebound in EUR/USD, with a move above the 1.1440 (78.6% expansion) to 1.1450 (50% retracement) area opening up the overlap around 1.1490 (50% retracement) to 1.1540 (61.8% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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