EUR/USD Faces Correction Amid Overbought Signals

The beginning of this week is expected to be calm in the markets, mainly because the stock market on Wall Street will be closed today due to the “Labour Day” holiday.

In recent sessions, the euro has been depreciating against the US dollar, following a long rally that intensified after the technical structure was breached. However, this week, volatility is likely to return to the markets, as several important data points on both the US and European economies are set to be released. Employment data in the US and economic activity in both Europe and the US will be in focus.

EUR/USD Daily Time Frame chart. Source: xStation 5

Technical Analysis

If we look at the behaviour of the EUR/USD, we can see that the reaction is not entirely unexpected, as the price had been showing signs of being overbought for quite some time and typically tends to correct near relative highs.

Nevertheless, the bullish scenario remains intact, at least as long as the price continues to trade above the technical structure that was previously broken.

The markets are factoring in interest rate cuts from both the ECB and the Fed; however, expectations that the Fed might accelerate the pace of cuts have been supporting the rise in the EUR/USD. If this week's data again indicates that the US economy urgently needs stimulation to avoid the worst-case scenario, then the EUR/USD pair could regain new momentum.

USD index, Weekly time frame chart. Source: xStation 5
 

Similarly, in the US dollar index, there are clear signs that the downward trend could extend in the long term. Although it is rebound in the short term, this behaviour is a result of testing the support zone that was tested last week.

Henrique Tomé,
Analyst Portugal