EUR/USD: Three reasons for an upward correction after the Fed-fueled downfall

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. However, it is time for a correction, according to FXStreet’s Analyst Yohay Elam.

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.”

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.”

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. Further down, 1.1860 provided support back then. 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.”