Failure to Hold Above Parity Opens Up December 2002 Low

EUR/USD Rate Talking Points

EUR/USD trades at parity for the first time since nearly two decades as it slips to fresh yearly low (1.0000) in July, and the exchange rate may fall towards the December 2002 low (0.9859) as the Relative Strength Index (RSI) sits in oversold territory.

EUR/USD Forecast: Failure to Hold Above Parity Opens Up December 2002 Low

EUR/USD remains under pressure after failing to defend the 2020 low (1.0340), and recent price action raises the scope for a further decline in the exchange rate as it extends the series of lower highs and lows from last week.

As a result, the bearish price action in EUR/USD may persist until the RSI climbs above 30 to offer a textbook buy signal, and fresh data prints coming out of the US may push the exchange rate to fresh yearly lows as the Consumer Price Index (CPI) is expected to increase for ten consecutive months.

The headline CPI reading is projected to hit 8.8% in June after expanding 8.6% per annum the month prior, and evidence of persistent price growth may trigger a bullish reaction in the US Dollar as it puts pressure on the Federal Reserve to step up its effort in combating inflation.

However, a slowdown in the core CPI may generate a mixed reaction as the Federal Open Market Committee (FOMC) shows little interest in implementing a 100bp rate hike, and Chairman Jerome Powell and Co. may retain the current path for monetary policy at the next interest rate decision on July 27 as the central bank appears to be on track to deliver another 75bp rate hike.

Until then, the bearish momentum behind EUR/USD may gather pace as the RSI holds in oversold territory, while the tilt in retail sentiment looks poised to persist as traders have been net-long the pair for most of 2022.

The IG Client Sentiment report shows 72.80% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 2.68 to 1.

The number of traders net-long is 4.27% higher than yesterday and 11.59% higher from last week, while the number of traders net-short is 11.50% higher than yesterday and 39.28% higher from last week. The rise in net-long interest has fueled the crowding behavior as 72.42% of traders were net-long EUR/USD last week, while the jump in net-short position comes with the exchange rate on the cusp of trading at parity.

With that said, EUR/USD may continue to carve a series of lower highs and lows over the remainder of the week as the US CPI is anticipated to increase for ten consecutive months, and the exchange rate may fall towards the December 2002 low (0.9859) as long as the RSIholds below 30.

EUR/USD Rate Daily Chart

Source: Trading View

• EUR/USD trades to a fresh yearly low (1.0000) as it extends the series of lower highs and lows from last week, and the bearish price action looks poised to persist as the Relative Strength Index (RSI) sits in oversold territory.
• In turn, EUR/USD may continue to trade to fresh yearly lows until the RSI climbs back above 30, with a break/close below the Fibonacci overlap around 0.9910 (78.6% retracement) to 0.9950 (50% expansion) to bring the December 2002 low (0.9859) on the radar.
• Failure to defend the October 2002 low (0.9685) may push EUR/USD towards the September 2002 low (0.9608), with the next area of interest coming in around 0.9530 (61.8% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong