EUR/USD Forecast: Balance tilts toward the bulls as dramas diminish

• EUR/USD is trading at the upper end of the range on USD weakness, positive developments.
• Italy and trade talks remain in the limelight.
• The technical picture continues improving but the pair remains hesitant.

EUR/USD kicks off Tuesday on a higher note. The central driver is the weakness of the US Dollar, which is closely associated with the slide in US bond yields. The benchmark 10-year Treasury yield slipped below the round number of 3%.

The focus is not merely on the benchmark figure but on the flattening of the yield curve. A higher yield on the 2-year note than on the 10-year one signaled an upcoming recession in the past. At the moment, the curve on this specific spread is flattening but not inverting. However, the spread between yields for three and five years has inverted and causes concerns.

The summit between US President Donald Trump and his Chinese counterpart Xi Jinping was hailed as a success and lifted markets. However, there are discrepancies between the details published by Washington and those by Beijing. It is unclear when the 90-day trade truce begins if China will scrap tariffs on cars as Trump tweeted and other differences. At the moment, goodwill and optimism prevail and the greenback remains on the back foot.

Back in the old continent, talks between Italy and the European Union continue over the budget. Rome gradually climbed down from the planned 2.4% budget deficit and they opened the door to 2%. Brussels may not find this sufficient. Also here, the rhetoric is constructive rather than looking for a fight.

France is set to announce the suspension of fuel tariffs which have sparked massive protests. The "gilets jaunes" movement turned violent in some cases in recent cases. The announcement is due to lower tensions which have been a major crisis for French President Emmanuel Macron.

The common currency received a minor boost from the opinion at the European Court of Justice, stating that the UK may revoke Article 50 unilaterally, opening a crack in the door to reversing Brexit. The Euro follows the Pound on substantial Brexit-related moves.

All in all, the Euro enjoys the calm around Italy, trade talks, and Brexit.

EUR/USD Technical Analysis

EUR/USD is trading above the 50 and the 200 Simple Moving Averages on the four-hour chart, a bullish sign. 1.1400 capped the pair late in November and is now critical for the next upside move. 

Further above, 1.1435 held the pair down previously in November and serves as another cap. 1.1475 was a high point in mid-November and the round number of 1.1500 was the high point of the month.

1.1380 was a swing high early in the week. 1.1350 was a swing low last week. More importantly, 1.1325 was the gap line, later closed. The former double-bottom of 1.1300 remains relevant.