Euro looks too hot to handle

After a short pause on Friday and Monday, the pressure on the dollar has returned. The dollar index is losing 0.2% on Tuesday after a two-day 0.8% bounce.

In our opinion, the dollar appears oversold, which increases the chances of a rebound. On the daily RSI for the EURUSD pair, the two peaks are approximately at the same level, while the price chart keeps rewriting highs. Such divergence often precedes corrective pullbacks.

However, currently, the RSI remains above 70, reflecting that bullish sentiment is still in place. This means that the rise in the pair may continue for some time and could even reach new multi-month highs.

As a rule on FX, the longer the growth continues, the deeper and wilder the later correction will be. If we recall, at the beginning of 2020, some, including us, pointed to an overheated US market, based on a similar divergence of RSI and the price. However, the initial coronavirus outbreak sparked the weakening of the markets and quickly turned into one of the sharpest collapses in more than 100 years of market history.

The prior situation of the market being overbought didn’t play a role in the coronavirus crash. It should be noted that EURUSD is doomed to decline from the current levels but may well be able to show an increase in the next couple of days.

However, it seems premature to join short-term purchases – its much more reasonable to wait for the pair to correct after a rapid rally or a long sideways trend.

The FxPro Analyst Team