EUR/USD Vulnerable to First RSI Oversold Reading in 2022

EUR/USD Rate Talking Points

EUR/USD trades to fresh yearly low (1.1090) despite the uptick in Germany’s Consumer Price Index (CPI), and looming developments in the Relative Strength Index (RSI) may accompany a further decline in the exchange rate if the indicator pushes into oversold territory for the first time in 2022.

Euro Forecast: EUR/USD Vulnerable to First RSI Oversold Reading in 2022

EUR/USD clears the June 2020 low (1.1101) after filling the price gap at the start of the week, and the Russia-Ukraine crisis may continue to produce headwinds for the Euro as the disruptions in economic activity puts pressure on the European Central Bank (ECB) to delay normalizing monetary policy.

As a result, the ECB may endorse a wait-and-see approach as the central bank plans to “end net purchases under the pandemic emergency purchase programme (PEPP) at the end of March, and President Christine Lagarde and Co. may tame speculation for an imminent change in regime as the Governing Council “stands ready to take whatever action is needed to fulfil its responsibilities to ensure price stability and financial stability in the euro area.”

With that in mind, fresh data prints coming out of the Euro Area may do little to influence the monetary policy outlook even though the core CPI is expected to increase to 2.5% from 2.3% per annum in January, and EUR/USD may continue to depreciate ahead of the next ECB interest rate decision on March 10 as the Federal Reserve is widely expected to deliver a rate hike later this month.

In turn, EUR/USD may continue to trade to fresh yearly lows as it carves a fresh series of lower highs and lows, and a further decline in the exchange rate may fuel the recent flip 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 63.08% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.71 to 1.

The number of traders net-long is 8.56% higher than yesterday and 21.12% higher from last week, while the number of traders net-short is 3.66% lower than yesterday and 34.65% lower from last week. The rise in net-long interest has fueled the recent flip in retail sentiment as 49.43% of traders were net-long EUR/USD last week, while the decline in net-short position could be a function of profit-taking behavior as the exchange rate trades to a fresh yearly low (1.1090).

With that said, EUR/USD may resume the bearish trend seen during the previous year as the Fed is on track to normalize monetary policy ahead of its European counterpart, and looming developments in the Relative Strength Index (RSI) may accompany a further decline in the exchange rate if the indicator pushes into oversold territory for the first time in 2022.

EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • The broader outlook for EUR/USD remains tilted to the downside as the 200-Day SMA (1.1608) continues to reflect a negative slope, with the exchange rate clearing the June 2020 low (1.1101) as it fails to defend the opening range for 2022.
  • Looming developments in the Relative Strength Index (RSI) may show the bearish momentum gathering pace if the indicator slips below 30 to push into oversold territory for the first time in 2022, with a close below the 1.1130 (50% expansion) region bringing the Fibonacci overlap around 1.1000 (78.6% retracement) to 1.1050 (61.8% expansion) on the radar.
  • Next area of interest comes in around 1.0860 (23.6% expansion) to 1.0930 (78.6% expansion) followed by the 1.0770 (100% expansion) to 1.0780 (100% expansion) region, which largely lines up with the May 2020 low (1.0767).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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