EUR/USD Rate Outlook Hinges on European Central Bank (ECB) Meeting

EUR/USD Rate Talking Points

EUR/USDcontinues to retrace the decline from the March high (1.1495) after breaking out of the April range, but the European Central Bank (ECB) meeting may rattle the recent appreciation in the exchange rate if the Governing Council takes additional steps to support the monetary union.

EUR/USD Rate Outlook Hinges on European Central Bank (ECB) Meeting

EUR/USD marks the longest stretch of gains for 2020 ahead of the ECB meeting as it extends the series of higher highs and lows from the previous week, and the technical outlook indicates that the bullish momentum may gather pace as the Relative Strength Index (RSI) pushes into overbought territory.

Image of DailyFX economic calendar for Euro Area

However, the ECB meeting on June 4 may influence the near-term outlook for EUR/USD even though the central bank is expected to keep Euro Area interest rates on hold as the Governing Council warns that “a swift V-shaped recovery could probably already be ruled out at this stage.”

In turn, the ECB may retain a proactive approach in combating the economic shock from COVID-19 as “growth scenarios produced by ECB staff suggested that euro area GDP could fall by between 5% and 12% this year,”and President Christine Lagarde and Co. may expand the scope of its asset-purchase programs as “the economic effects of the pandemic would continue for a considerable period after the coronavirus was contained, as the decline in demand owing to precautionary motives or to income losses could be expected to weigh on economic activity, leading to a slow recovery.

The threat of a protracted recovery may push the Governing Council to utilize the balance sheet throughout 2020 as “strong and timely efforts were urgently needed to prepare and support the recovery,” and the ECB meeting may trigger a bearish reaction in the Euro if the central bank takes additional steps to support the monetary union.

However, President Christine Lagarde and Co. may attempt to buy time as the European Union (EU) mulls a EUR750B recovery fund, and more of the same from the ECB may keep EUR/USD afloat as market participants scale back bets for additional monetary support.

With that said, EUR/USD may carve a series of higher highs and lows throughout the first week of June, and the bullish momentum may gather pace over the coming days as the Relative Strength Index (RSI) pushes into 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 retraces the decline from the March high (1.1495) after breaking out of the April range, and the exchange rate may continue to carve a series of higher highs and lows as the Relative Strength Index (RSI) pushes into overbought territory.
  • Recent developments in the RSI indicate that the bullish momentum could gather pace over the coming days as the oscillator extends the bullish formation from earlier this year and crosses above 70 for the first time since March.
  • In turn, a break/close above the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) brings the 1.1270 (50% expansion) to 1.1290 (61.8% expansion) region on the radar, with the next area of interest coming in around 1.1340 (38.2% expansion).

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— Written by David Song, Currency Strategist

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