EUR/USD flashing most bearish technical signal since January 2018

Written by: Crispus Nyaga
July 24, 2020
  • The EUR/USD is having its best week since June as investors react to upbeat data from Europe.
  • Data from Markit showed that the manufacturing and services PMI data rose to the highest level this year.
  • However, the RSI and Stochastic oscillator shows that the pair is the most overbought since January 2018.

The euro is on track for its best week since June as investors react to the upbeat economic numbers from Europe. The EUR/USD pair is trading near its highest level since October 2018. The pair has jumped by more than 1.7% in the past five days alone.

EUR/USD
EUR/USD vs EUR/GBP and EUR/AUD

European business activity bounces back

The EUR/USD pair is little changed today as traders react to upbeat economic data from Europe. According to Markit, the preliminary manufacturing PMI in the bloc increased to 51.1 in July as countries continued to open up. That was the highest PMI since 2018 and was better than the 50.0 that analysts were expecting. A PMI reading above 50 usually sends a signal that business activity is growing.

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In the same month, the services PMI rose to 55.1 from the previous 48.3. Analysts were expecting this PMI to jump to 51.1. As a result, the so-called composite PMI that combines the manufacturing and services PMIs rose to 54.8, the highest it has been since July 2018.

According to Markit, demand, which is measured by order inflows rose to the highest level since October 2018. Expectations for future output also rose while businesses reported higher operational costs. France was the best-performing country, with its composite PMI rising to 57.6. In Germany, the composite PMI rose to 55.5 as output increased for the first time since February. In a statement, Chris Williamson of Markit said:

“Companies across the euro area reported an encouraging start to the third quarter, with output growing at the fastest rate for just over two years in July as lockdowns continued to ease and economies reopened. Demand also showed signs of reviving, helping curb the pace of job losses.”

Other recent data from Europe have been relatively strong. For example, retail sales rose by 17.8%in May while the unemployment rate was better than expected. Similarly, industrial production in May declined at a slower rate than earlier expected. Inflation too has bounced back. At the same time, the large stimulus by the ECB and the recently-passed recovery fund has helped support the economy.

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EUR/USD technical outlook

GBP/USD
GBP/USD technical forecast

The EUR/USD pair is trading at 1.1607, which is higher than this year’s low of 1.0625. On the weekly chart, the price is above the 50-day and 100-day exponential moving averages. It is also between the 50% and 38.2% Fibonacci retracement level. At the same time, the RSI has moved to 65, which is the highest it has been since February 2018.

Similarly, the two lines of the Stochastic oscillator have moved to the highest level since January 2018. This implies that the EUR/USD is getting overbought, which means that the upward trend could be limited.