Euro Extends Gains as the US Dollar Continues to Soften

Divergence Signal Proves Useful: EUR/USD Jumps More than 200 Pips

In our previous post, we warned that the EUR/USD pair is showing clear signs of bullish divergence, which more often than not, results in a move to the upside. This pattern, along with other factors (RSI’s oversold position and the presence of a support level), triggered a move that extended from 1.0350 to 1.0600.

The climb was facilitated by falling U.S. government yields and a pullback in the US Dollar Index (DXY), which retreated last week from extreme overbought levels. The Euro, on the other hand, was boosted by a hawkish stance adopted by ECB official Klaas Knot who signaled that a 50 bps rate hike may happen as soon as July.

Key Events for the Week Ahead

Monday is a light day in terms of economic data releases but the action picks up Tuesday with the release of Manufacturing and Services data for the Eurozone and the United States. The reports are leading indicators of economic health and usually have a medium impact on the respective currencies.

On the same day, ECB President Lagarde will speak at the World Economic Forum, in Davos at 6:00 pm GMT. She will offer opening remarks, which usually don’t trigger massive volatility, but caution should be used nonetheless.

Wednesday at 8:00 am GMT, the ECB President will participate in a discussion titled “European Unity in a Disordered World?” at the same Forum. Later in the day, at 6:00 pm GMT, the FOMC will release the Minutes of their latest meeting, detailing the reasons that determined the latest rate vote, and possibly offering clues about future hikes.

Thursday’s main event is the U.S. Prelim GDP, which comes out at 12:30 pm GMT and the final highlight of the week will be the Core PCE Price Index, which is scheduled for release Friday at 12:30 pm GMT. The PCE Index is one of the Fed’s preferred gauges of inflation and has a hefty impact on the interest rate.

Technical Outlook – EUR/USD

The pair is currently trading at 1.0610 and is rapidly approaching the resistance at 1.0635. Euro strength combined with USD weakness will probably take the pair above this barrier and into the 50-day Moving Average.

Last week we talked about bullish divergence, but we can already see that bearish divergence is forming. The RSI has already climbed above its previous peaks, while the price is yet to surpass any significant previous high. This is called hidden bearish divergence and appears in a downtrend. Its signal is more powerful because it is in line with the prevailing trend but the timing of the potential drop is difficult to predict accurately.

The levels to watch are 1.0635 as immediate resistance, followed by the 50-day MA and the level at 1.0775. Each of these can be a good place for downtrend resumption, with the probability increasing the higher the price goes.