- USD remains under pressure as US-China tensions rise
- EUR/USD trading at key Fibonacci levels
- Will bulls be able to break through key area of resistance or is the pair overbought, as indicated by the RSI?
Bulls Look for a Break Above Key Fibonacci Level
The EU summit ended yesterday with EU leaders securing a €750 billion recovery fund, aimed at supporting European economies to recover from the effects of the coronavirus pandemic. As a result, inflows into the euro have accelerated, while growing US-China tensions, combined with an increase in the number of coronavirus cases in the US, continues to add pressure to the Dollar.
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The weekly chart below highlights Fibonacci levels from two major moves. The first Fibonacci retracement (pink) is taken from the January 2017 low to the February 2018 high (the medium-term move), while the second Fibonacci retracement (purple), represents the shorter-term move between the February 2018 high and the March 2020 low.
Since August 2019, the EUR/USD has been trading in a key area of confluence between the 76.4% and 61.8% retracement of the medium-term Fibonacci. This relatively tight span containing the two above-mentioned Fibonacci levels has formed clear areas of support and resistance. However, after breaking through the 61.8% level (1.11846), price action has favored the bulls, with the 50% retracement of the medium-term move now forming a level of support at 1.14407.
EUR/USD Weekly Chart
Chart created by Tammy Da Costa, IG
RSI Suggests EUR/USD May be Overbought
With Fibonacci levels holding strong, the RSI indicates that the EUR/USD may be entering into overbought territory. While the Relative Strength Index (RSI) is a technical indicator which is commonly used to measure the momentum of the trend, it is often used to determine when a financial instrument enters into periods of overbought or oversold territory.
As highlighted on the 4 hour chart below, the RSI is trading above 70, signaling that although a strong upward trend is present, the pair may be entering into overbought territory. Should the RSI cross from above the 70 line towards the downside, bears may see it as a sign that a reversal may be on the cards.
EUR/USD 4-Hour Chart
Chart prepared by Tammy Da Costa, IG
As price action continues to fluctuate between the short-term and medium-term Fibonacci levels, bulls continue to fight for a breakout above the 50% retracement of the shorter-term Fibonacci at 1.15990, towards the psychological level of 1.16. Should this level be broken, the upside may prevail with the 38.2% retracement of the medium-term Fibonacci providing resistance at 1.17095.
Meanwhile, bears may be looking for an opportunity of a reversal should prices fall below 1.14471, which is the 50% retracement of the medium-term move. If this level is broken, the 38.2% retracement of the shorter-term move, may be the next level of support at 1.13724.
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According to client sentiment, at the time of writing, majority of retail traders are showing a bearing bias towards EUR/USD, with 71% of traders holding short positions. We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests that the EUR/USD may rise.
— Written by Tammy DaCosta, Market Writer for DailyFX.com
Contact and follow Tammy on Twitter: @Tams707