Euro: Range dynamics and stretched Dollar move – Societe Generale

Societe Generale analysts note that EUR/USD has traded mostly between 1.14 and 1.20 over the past year, with low volatility magnifying even small breakouts. They highlight RSI signals and positioning data, and points out that the recent Dollar rally looks stretched, with a 1.12 EUR/USD forecast for next year ranked as the lowest by Consensus Economics.

Range trading, RSI signals and forecasts

"EUR/USD has spent the majority of the last year in a narrow range between 1.14 and 1.20, averaging about 1.17 in the process. The upshot is that even a small breakout can be magnified. In January, for example, a strong bearish dollar consensus, fuelled by President Trump's desire for lower rates and a weaker currency, drove EUR/USD from under 1.16 to above 1.20 before it fell back to 1.18 within two weeks."

"In January, RSI’ sounded an alarm that the euro was overvalued, then undervalued, and then overvalued again, all within a few weeks. In March, they screamed "oversold" as EUR/USD closed in on 1.14, and that level held. The message now is that the dollar rally is stretched relative to recent moves."

"In this environment, a technical-analysis Luddite like me watches RSI levels more closely than usual."

"Consensus Economics ranked our 1.12 forecast for this time next year as the lowest in its June report, which was published when EUR/USD was just above 1.15."

"Low volatility compresses forecasts, but it also increases position sizes and, in the process, means that a break from the range is likely to cause enough pain to limit how far it can go. All of which means that the move we have seen—from above 1.18 in mid-April to below 1.14 in mid-June—is likely to slow, at the very least. Fed and ECB expectations have been reset, and we need fresh economic data to drive the next leg of the move."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)