EUR/USD Rate Eyes June High as Bullish RSI Trend Remains Intact

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EUR/USD Rate Talking Points

EUR/USD extends the advance from earlier this week to trade to a fresh monthly high (1.1352), and a bull flag formation may unfold over the coming days as the Relative Strength Index (RSI) continues to track the bullish trend from earlier this year.

EUR/USD Rate Eyes June High as Bullish RSI Trend Remains Intact

EUR/USD approaches the June high (1.1423) even though the European Commission downgrades the economic outlook for the Euro Area, with the group now forecasting an 8.7% contraction in 2020 versus an initial forecast for a 7.7% decline.

Fears of a deeper recession may put pressure on the European Central Bank (ECB) to further support the monetary union as the Governing Council “stand ready to adjust all of its instruments,” and the central bank may endorse a dovish forward guidance throughout the second half of 2020 as ECB officials rule out a V-shape recovery.

It remains to be seen if the ECB will deploy more unconventional tools after expanding the Pandemic Emergency Purchase Programme (PEPP) by EUR600 billion in June, and the central bank may stick to the sidelines at its next interest rate decision on July 16 as Chief Economist Philip Lane emphasizes that the Euro Area is in “the second stage of recovery.”

It seems as though the ECB is on track to establish a wait-and-see approach as board member Yves Merschreveals that a COVID-19 recovery fund “would reduce the burden on monetary policy and the need for further easing of the policy stance,” with President Christine Lagarde striking a similar tone as the central bank head insists that “the real game-changer element is the recovery fund.”

In turn, the ECB may gradually soften the dovish forward guidance as European Council President Charles Michel vows to ‘start real negotiations with the member states, and will convene an in-person summit, around mid-July in Brussels,’ and a growing number of ECB officials may tame speculation for additional monetary support as “euro area activity is expected to rebound in the third quarter.”

With that said, the reluctance to implement lower interest rates may keep EUR/USD afloat as the ECB looks poised to retain the current policy in July, and the exchange rate may stage another attempt to test the March high (1.1495) as a bull flag formation takes shape, while the Relative Strength Index (RSI) continues to track the bullish trend from March.