EUR/USD technical analysis: further gains likely after breach of $1.20

EUR/USD broke this week above the psychologically important $1.20 level for the first time since May 2018, extending the advance that has lifted the pair from a low just above $1.06 in little more than eight months. With this upward momentum still in place, there is now a possibility that its underlying strength could lift it still more, with the high just above $1.25 touched in February 2018 a reasonable long-term target.

EUR/USD price chart, daily time frame (3 May 2017 – 2 December 2020)

As the chart above shows, EUR/USD is not yet overbought, with the 14-day relative strength index, or RSI, still below the 70 level that implies an overbought market. Moreover, any short-term downside is likely to be limited by the 20-day moving average (DMA) at $1.188, with the 50-DMA and the 100-DMA just below $1.18 providing further support ahead of last month’s low just above $1.16.

From a fundamental perspective, there is a fly in the ointment: the European Central Bank has indicated previously that it does not want EUR/USD above $1.20 for fear of damaging EU exports to the US and because it would represent a tightening of monetary policy at a time when policy should be loose to help the EU economy recover from the downturn caused by the coronavirus pandemic.

However, more recently, the European Central Bank (ECB) has indicated that it regards the euro’s levels against a range of currencies as more important than just its exchange rate against the US dollar so it might not intervene in the markets – even verbally – to attempt to weaken it as some euro bulls fear.