EURUSD expected to have further room to dip

Lim Jun Kit

AFTER peaking at 1.2348 in January 2021, the EURUSD has been on a persistent downtrend that saw the pair decline by 20 per cent, breaching below parity at around 0.98. The EURUSD’s steep descent has also sent prices to their lowest point in 20 years. This report will highlight a few observations that point to further weakening of the currency pair.

The strongest indication that the EURUSD has further room to dip is that prices are trapped in a falling channel chart pattern. The falling channel can be identified by drawing two trendlines, connecting a series of lower highs and lower lows which would then form the resistance and support levels. The chart pattern identified is a bearish continuation signal that suggests prices are on a downtrend and are set to continue downwards. The current falling channel on the daily chart stretched back to February 2022, but the EURUSD had formed a couple of falling channels since its peak in January 2021, with each formation breaking below the previous one as the slope of decline steepens.

To add on, the Relative Strength Index (RSI) also validates the bearish outlook for the EURUSD. The RSI is a momentum indicator that suggests overbought conditions when it is above 70, and oversold conditions when it is below 30. Whenever the reading is below the neutral line of 50, the momentum is bearish and vice-versa. At the time of analysis on Sep 23, 2022, the RSI reading is in the bearish territory with a reading of 35. We hold the view that prices have further room to fall before they hit the oversold level at 30. As long as the RSI remains below 50, the bias remains bearish for the pair.

Moreover, the Moving Average Convergence Divergence (MACD) indicator also provides clues that the bearish momentum is in full swing for the EURUSD. The histogram of the MACD shows the distance between the MACD and its signal line. If the MACD is below the signal line, the histogram will be below the baseline, suggesting a bearish momentum. Currently, the bearish momentum is getting stronger as the histogram has slid below the signal line and is diving further below the baseline of zero.

Looking ahead, as long as prices remain below parity, we set our downside target for the EURUSD at 0.97 (S1). In the event the 0.97 support level is broken, the subsequent technical target would be set at 0.94 (S2). In the alternate scenario of a rebound to the upside, we set the target resistance level to be at 1.00 (R1) and 1.03 (R2) in extension, which should cap the pair from advancing higher.

The writer is strategist at Phillip Nova