Original article by Fiona Cincotta, source: Forex.com
Link: https://www.forex.com/en-ca/news-and-analysis/eurusd-gbpusd-momentum-indicators-signal-short-term-reversal-risks/
Rewritten and expanded article:
EUR/USD and GBP/USD: Short-Term Reversal Risks Emerge as Momentum Weakens
Recent price behavior in the EUR/USD and GBP/USD currency pairs suggests potential short-term reversals as momentum indicators begin to soften. Both key pairs have enjoyed recent strength, but signs of weakening momentum—particularly in technical indicators such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD)—suggest that traders may be preparing for small corrections or a shift in direction. While fundamental factors continue to influence overall trends, technical setups signal caution for bulls.
EUR/USD Technical Overview
EUR/USD has recently seen solid gains, but the rally is beginning to show signs of fatigue. The euro has appreciated notably against the US dollar in the past few sessions, backed by a weaker dollar and improved sentiment across the Eurozone. However, technical analysis now indicates that the momentum that drove the currency higher may be faltering.
Key Technical Observations for EUR/USD:
– RSI: The Relative Strength Index climbed above the 70-level, entering overbought territory. However, it has since curled lower, indicating a potential bearish divergence. This is often an early warning signal of a potential pullback.
– MACD: The MACD histogram is showing early signs of weakening bullish momentum. Although the MACD line remains above the signal line, the gap is narrowing, which implies that buying power is diminishing.
– Price Action: EUR/USD reached a key resistance zone near 1.1000 before retreating slightly. If the pair fails to break decisively above this level, a correction toward support around 1.0850 or 1.0800 could unfold.
– 50-Day Moving Average: The pair remains above the 50-day simple moving average, indicating continued medium-term bullishness. However, proximity to resistance and weakening momentum may lead to a period of consolidation or a short-term pullback.
Fundamental Factors Supporting the Euro
– ECB Policy Outlook: Market participants expect that although the European Central Bank (ECB) may begin policy normalization or modest easing later this year, policy divergence with the Fed is narrowing. This has supported the euro recently.
– Inflation Trends: Eurozone inflation data has remained sticky, prompting traders to believe that any interest rate cuts by the ECB will be limited and measured.
– Economic Sentiment: Business sentiment surveys have indicated that economic activity is stabilizing in major Eurozone economies, improving investor confidence in the euro.
Still, despite these supportive fundamentals, technical exhaustion and weakening momentum indicators suggest the bullish move in EUR/USD may be due for at least a pause.
GBP/USD Technical Overview
Sterling has also made impressive gains against the US dollar in recent weeks. The GBP/USD pair rose sharply, driven by rising expectations for a stronger UK economy and a softer dollar backdrop. However, like EUR/USD, GBP/USD now displays signs of momentum loss that could herald a near-term correction.
Key Technical Observations for GBP/USD:
– RSI: The Relative Strength Index crossed above 70, signaling overbought conditions. It has since started to back away from these levels, which could reflect reduced bullish pressure.
– MACD: The MACD shows a declining histogram and a potential bearish crossover looming. This would serve as an additional confirmation of a short-term pullback.
– Horizontal Resistance: GBP/USD approached resistance around the 1.2800 handle but failed to break through convincingly. A failure to surpass this level could result in a pullback to 1.2600 or even 1.2500.
– Trendlines: The pair remains within an upward-sloping price channel, but any break below the channel support could accelerate selling pressure.
Fundamental Factors Supporting the Pound
– BoE
Read more on EUR/USD trading.