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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Technical Update - EURUSD and Dollar Index ripe for a correction. Maybe a larger one
Kim Cramer Larsson
Technical Analyst, Saxo Bank
EURUSD is showing Bullish divergence i.e., price is price is falling but the RSI is slowly rising. A divergence indicates imbalance in the market and a weakening trend usually followed by a price reversal/correction. However, the divergence can also be “traded out” by a new lower low on the RSI. First indication of that scenario is if RSI breaks below its rising trendline.
However, if EURUSD closes above resistance at 1.01 it could challenge the medium-term falling (black) trendline and if that trendline is broken EURUSD could move to resistance at around 1.0370
In the less likely event that EURUSD closes above 1.0370 the medium-term falling trend has reversed with more upside potential to a round 1.078 which is 0.382 Fibonacci retracement of the bear move since Q3 2021. RSI divergence also here on the Weekly chart indicates a correction scenario is likely to play out but the upside potential is likely to be limited.
Reason for the likely limited upside is that the on the monthly chart the trend is still down and there is no divergence. However, RSI is nearing values close to 20, a value not seen in 7 years. This picture indicates a correction, but down trend could very well soon resume.
A likely scenario is a correction up to around 1.0250-1.0350 where the correction will exhaust and bear trend resumes.
If EURUSD breaks below 0.9860 next support is at around 0.96.
The Dollar Index has reached the 0.764 retracement of the 2000-2008 bearish trend and 1.382 projection of the 2020-2021 correction around 109.50. Could be time for a correction before higher levels. There is no RSI divergence on the monthly chart but if looking at the daily and weekly it is a different story
The Dollar Index is showing divergence on daily and weekly indicating a correction in the near future is likely. Possibly down to test the rising (black) trend line.
On the weekly the divergence is even more pronounced. RSI is currently testing its falling trend line. If closing above the trendline Dollar Index is likely to move to higher levels but if RSI is rejected a reversal is likely. A correction that could take the Dollar Index down to around 105. If closing below 104.50 the Index could drop to around 10.50-101.50.
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