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EUR/USD Rates to Watch Ahead of ECB Interest Rate Decision

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EUR/USD Rate Talking Points

EUR/USD trades to a fresh monthly high (1.1375) ahead of the European Central Bank (ECB) interest rate decision, and a bull flag formation appears to be unfolding as the Relative Strength Index (RSI) continues to track the bullish trend from earlier this year.

EUR/USD Rates to Watch Ahead of ECB Interest Rate Decision

EUR/USD appears to be on track to test the June high (1.1423) as the ECB is expected to retain the current policy on July 16, and the central bank may endorse a wait-and-see approach for the second half of 2020 as fiscal authorities attempt to draw up a COVID-19 recovery fund.

It seems as though the Governing Council is in no rush to deliver additional monetary support as European Council President Charles Michel vows to ‘start real negotiations with the member states,’ with fiscal authorities scheduled to hold a special meeting between July 17-18 ‘to discuss the recovery plan to respond to the COVID-19 crisis and a new long-term EU budget.

In turn, the ECB may establish a wait-and-see approach after expanding the Pandemic Emergency Purchase Programme (PEPP) by EUR600 billion in June, and the central bank may stick to the sidelines over the coming months as board member Yves Merschreveals that a European recovery fund “would reduce the burden on monetary policy and the need for further easing of the policy stance.”

Nevertheless, President Christine Lagarde and Co. may continue to emphasize that the Governing Council standsready to adjust all of its instruments” as ECB officials rule out a V-shape recovery, and it remains to be seen if the central bank will alter the forward guidance over the coming months as Chief Economist Philip Lane insists that the Euro Area is in “the second stage of recovery.”

With that said, the reluctance to implement lower Euro Area interest rates may keep EUR/USD afloat as the ECB moves to the sidelines, and the exchange rate may stage another attempt to test the March high (1.1495) as a bull flag appears to be unfolding, while the Relative Strength Index (RSI) continues to track the bullish trend from March.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • EUR/USD appeared to be on track to test the March high (1.1495) after breaking out of the April range, but the exchange rate continues to track the June range following the failed attempt to close above the Fibonacci overlap around 1.1390 (61.8% retracement) to 1.1400 (50% expansion).
  • Nevertheless, a ‘golden cross’ materialized towards the end of June as the 50-Day SMA (1.1137) crossed above the 200-Day SMA (1.1051), and a bull flag formation appears to be unfolding in July as the Relative Strength Index (RSI) continues to track the bullish trend from earlier this year.
  • Will keep a close eye on the RSI as it rebounds from trendline support, and the bullish momentum may gather pace over the coming days if the indicator climbs towards overbought territory.
  • Lack of momentum to trade below the 1.1190 (38.2% retracement) to 1.1220 (78.6% expansion) area has pushed EUR/USD back above the Fibonacci overlap around 1.1270 (50% expansion) to 1.1290 (61.8% expansion), with the close above 1.1340 (38.2% expansion) bringining the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region on the radar.
  • Next area of interest comes in around 1.1430 (23.6% expansion) to 1.1450 (50% retracement), which largely lines up with the June high (1.1423), followed by March high (1.1495), which aligns with the overlap around 1.1510 (38.2% expansion) to 1.1520 (23.6% retracement).

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— Written by David Song, Currency Strategist

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