EUR/USD gets rejected at 1.18 as RSI signals overbought conditions

EUR/USD has posted impressive gains over the past ten days, rising 3.2% from 1.1450 to a high near 1.1830. However, the rally stalled as the pair faced strong resistance at the 1.18 level. Although Tuesday extended the bullish trend, upward momentum faded by the close, pulling the pair back below 1.18. This appears to have been a largely technical move, with the dollar regaining some ground ahead of the key U.S. jobs report due Thursday. As a result, another upside attempt in the short term remains possible.

That said, technical signals are beginning to flash caution. The Relative Strength Index (RSI) recently surged to 75—a level that has historically preceded price corrections. If the RSI dips back below 70 in upcoming sessions, a deeper pullback could be in play, making the 1.17 handle a critical area to watch for support. On the flip side, a confirmed daily close above 1.18 would likely validate the continuation of the uptrend.

EUR/USD daily chart

(Past performance is not a reliable indicator of future results)

Fundamentals Remain Euro-Supportive

From a fundamental perspective, the euro continues to enjoy broad-based support. The European Central Bank (ECB) has taken a proactive approach over the past 12 months, lowering rates by 200 basis points. With inflation trending back toward its 2% target, the ECB is now in a position to pause and monitor incoming data before considering further policy shifts. This measured stance has been welcomed by markets, helping the euro strengthen steadily even as interest rate differentials favour the U.S. dollar.

The dollar weakness has also been key for EUR/USD. Concerns around potential tariff escalations under Donald Trump’s proposed trade policies and fears over the ballooning U.S. debt load have undermined confidence in the greenback. As a result, the euro has outperformed, even in the face of a narrowing rate advantage.

Risks to the Euro's Rally

Still, several headwinds could limit further upside in EUR/USD. ECB officials have voiced concern about the rapid appreciation of the euro, which could dampen export competitiveness and weigh on inflation. ECB Vice-President Luis de Guindos has suggested that while an exchange rate around $1.20 may be tolerable, a move beyond that level could present challenges for the eurozone economy.

Additional volatility could stem from the reintroduction of U.S. tariffs scheduled for July 9, which may inject fresh uncertainty into global markets. Broader geopolitical tensions and unresolved trade negotiations, particularly in the context of energy security, also pose downside risks that could cap further gains in the single currency.

Lagarde's Inflation Warning

ECB President Christine Lagarde reinforced this cautious outlook during her remarks at the central bank’s annual symposium in Sintra, Portugal. While acknowledging the success in bringing inflation back to the 2% target, she warned that the battle is not yet over. Lagarde emphasized the growing unpredictability of inflation, citing supply chain disruptions and external shocks that have forced companies to adjust prices more frequently. The preliminary CPI reading for June showed another slight uptick in monthly price pressures, underlining the need for continued vigilance by the ECB.

As EUR/USD hovers near key resistance, the balance between supportive fundamentals and rising external risks will be critical in determining the pair’s next move. For now, traders will be watching closely for confirmation either of a breakout or a deeper correction.