EUR/USD Forecast: Teflon currency pair has more reasons to fall than rise
|- EUR/USD has been looking for a new direction in a narrowing range.
- Rising Sino-American tensions and concerns about the US economy may weigh on sentiment.
- Monday's four-hour chart is pointing to a narrowing wedge.
Nothing sticks to Teflon pans – until it does – and no trading range lasts forever. EUR/USD is trading in a narrowing triangle, or wedge, and technical analysis textbooks suggest it should soon pick a direction and run with it.
Will it break higher or lower? There are more reasons to favor the downside. The market mood has been positive, diminishing demand from the safe-haven dollar, yet this may change.
Sino-American tensions remain elevated on several fronts. The US continues accusing China of failing to keep coronavirus under control and one adviser went even further. Peter Navarro, a senior White House adviser, and a known China hawk said that the world's largest economy deliberately sent infected people to sow the seeds of the disease in other countries.
Hu Xijin, the editor of the Global Times – an English language outlet that serves as a mouthpiece of Beijing – advocated that his country should arm itself with additional nuclear weapons amid American aggression. He referred to new missile technology that President Donald Trump dubbed a "supper duper rocket." Both countries are also at loggerheads over what Huawei – the Chinese telecoms giant – can and cannot do.
Another potential upside driver of the dollar is another stark message from Jerome Powell, Chairman of the Federal Reserve. In an interview to 60 Minutes, the central banker said that it could take up to late 2021 for the economy to recover, and in any case – he does not foresee a full recovery without a vaccine. Powell warned that the unemployment rate could hit 25%.
He spoke two days after US Retail Sales figures showed a plunge of 16.4% in April, worse than expected. However, consumer confidence is edging up, according to the University of Michigan's preliminary read for May.
House Democrats have passed a $3 trillion bill that includes additional relief to workers, funding for healthcare, and more. While Republicans said it is dead on arrival. Will this package be the basis for further stimulus? If that happens, it would be good news for stocks and adverse for the dollar, but that is yet to happen.
In the old continent, there is room for hope as COVID-19 statistics continue falling in the hardest-hit countries such as Spain and Italy. Europe's largest economies are gradually opening up. However, there are still doubts about the European Central Bank's ability to help. The German constitutional court's ruling that the part of the ECB's bond-buying scheme is illegal may limit further action and governments' willingness to spend.
Overall, there are many forces at play with the downside more appealing than the upside.
EUR/USD Technical Analysis
Euro/dollar is setting lower highs and higher lows – trading in a narrowing triangle, or wedge. Momentum on the four-hour chart is pointing to the downside and the currency pair is trading below the 50, 100, and 200 Simple Moving Averages. All in all, bears are in the lead.
Some support awaits at 1.0790, a low point on Friday. It is followed by May's low of 1.0765. Next, April's trough of 1.0730 awaits EUR/USD.
Immediate resistance is at the daily high of 1.0830 and followed by 1.0850, a swing high from last week that also converges with the 100 SMA. Further up, last week's peak of 1.0895 is another cap.
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