Here’s a warning for latecomers to the EUR/USD rally

EUR/USD has surged to fresh 2024 highs
RSI (14) sits in overbought territory on the daily timeframe
Outside the early stages of the pandemic, whenever this overbought, it has coincided with a near-term market top

Overview

EUR/USD bulls are feeling emboldened with the common currency surging to highs not seen since July 2023 against the US dollar. However, such has been the rush to buy the euro since the start of August, it’s now sitting at extremely overbought levels on RSI (14) on the daily.

As the chart below shows clearly, that should be a worry for late-to-the-party longs.

EUR/USD stretched. Snap-back next?

The top pane is the EUR/USD daily with the bottom pane RSI (14). The red line in latter is used to show when EUR/USD has been this overbought in the past. The orange vertical dotted line shows what the price did after similar overbought episodes going back to the tail-end of the GFC.

Outside the initial stages of the pandemic indicated by the grey shading in the top pane, every single occasion RSI (14) has been this level or higher has coincided with a near-term market top. Some have been small reversals, other considerably larger.

While that doesn’t guarantee another reversal on this occasion, it is a warning to those chasing the pair higher ahead in anticipation of Fed rate cuts. They were priced in long ago with the magnitude of expected easing not really changing over the past fortnight even as the dollar sank.

Rally comes across as a USD-driven event

And when you look at the European data over recent months, it’s hardly a stellar set of numbers. Citi’s economic surprise index – which measures how data comes in relative to market expectations – sits at the lowest level in 11 months, indicating most releases are missing to the downside.

Source: Refinitiv

As such, the EUR/USD surge comes across as technically driven and underpinned by easing expectations that have been relatively static since the early parts of August. If correct, the signal from RSI (14) may be even more pertinent for traders to consider ahead of the latest batch of flash PMI reports due later in the session.

If recent trends persist, they may show the US outperforming the eurozone again on a relative basis. Combined with recent US data flow which has looked reasonable considering where we sit in the cycle, such a scenario may be enough to prompt a rethink on the eight Fed rate cuts markets have priced by June 2025, and whether Jerome Powell will deliver a message fitting with that pricing when he speaks at Jackson Hole on Friday.

EUR/USD technical levels

If we were to see a EUR/USD reversal, 1.1140, 1.10452 and 1.0948 are downside levels to note. Should the signal from RSI prove to be false, a continuation of the rally would likely target a push towards 1.12760, the high set in July 2023.

-- Written by David Scutt

Follow David on Twitter @scutty

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