- EUR/USD has been extending its falls in response to the Fed and despite lower US yields.
- Repositioning ahead of the weekend could trigger an upside move.
- Friday's four-hour chart is showing the currency pair is in oversold territory.
What comes down, must come up – at least partially. Forex trading is never a one-way street and even big breakouts have their countertrends. The US dollar has been storming the board since the Federal Reserve signaled it is moving toward tapering its bond-buying scheme and bringing forward rate hikes to 2023.
The bank seems worried about inflation becoming persistent rather than transitory and seems confident that big job gains are on the way –despite evidence of slower growth in labor markets. Jerome Powell, Chair of the Federal Reserve, seems to have abandoned his outcome-based approach for one that is more forward-looking.
The shift in the Fed's approach is undoubtedly significant and justified a large move in the dollar. EUR/USD is already more than 200 pips below pre-decision levels. The greenback's move against the euro also makes sense as the European Central Bank's approach to bond-buying remains dovish – the scheme is set to continue at full speed. Euro/dollar deserves to fall due to this contrast.
However, it is time for a correction.
1) Yields reverse course
In the past few months, the dollar's moves have been correlated with returns on US Treasury yields. In response to the Fed, 10-year bond yields leaped by some 10 basis points to 1.59%, maintaining that correlation.
However, they have been drifting lower since then, standing at below 1.51% at the time of writing. The dollar is set to catch up with the bond market.
2) Weekend repositioning
Forex trading is 24/5, not 24/7. Investors will likely take dollar profits and clear positions ahead of the weekend. After such a sharp move – atypical for euro/dollar in recent months – there is room for an upswing.
Moreover, markets may begin looking ahead and remember that the Fed is not the only game in town. Europe's rapid vaccination rate is a plus for the common currency.
3) EUR/USD is oversold
The Relative Strength Index (RSI) is well below 30 – deep in oversold territory. That can last for some time, but not forever. After spending a day in the red, there is room for recovery.
Support awaits at 1.1891, which was the bottom on Thursday and the lowest since mid-April. Furtehr down, 1.1860 provided support back then. The next levels to watch are 1.1825 and 1.1780.
Resistance is at 1.1925, Friday's high so far, followed by 1.1950, a cushion from April. The next caps are 1.1980 and 1.2010.
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