EUR/USD analysis: risk-off collapses just warming up

EUR/USD Current price: 1.1411

  • Turkish Lira´s collapse could spread like wildfire to global markets.
  • Trade war tensions to add to risk-averse sentiment.

The collapse of the Turkish Lira last Friday dragged the common currency alongside, unwinding a sell-off of high-yielding assets that left the greenback the one and only winner. Reports that the ECB officers are concerned about European banks’ exposure to Turkey, where behind panic selling. According to the BIS, Turkish borrowers owe roughly €140B to Spanish, French, and Italian banks. The EUR/USD pair closed the week at 1.1411 after trading as low as 1.1387, this last a level previously seen in July 2017. The US released July inflation data in the last trading day of the week, which while not impressive, keeps the Fed in its gradual path of rising rates. Annual inflation rose 2.9% matching June's increase and slightly below the market's forecast of 3.0% while excluding volatile energy and food prices, the CPI was up 2.4%, the largest rise since September 2008. Adding fuel to the fire, US President Trump announced he authorized doubling tariffs on steel and aluminum to Turkey. Given that Turkish President Erdogan has taken no measures to fight back the Lira's crumble, global markets may continue to be affected by fears during the upcoming days.  

In the meantime, Trump's war with China and its neighbors continues. Both, the US and China announced new rounds of tariffs to take effect by the end of the month. NAFTA talks between the US and Mexico are now focused on the auto industry, looking to exempt Mexico from special tariffs. In regards to Canada, Trump tweeted: "Canada must wait. Their Tariffs and Trade Barriers are far too high. Will tax cars if we can’t make a deal!" The week will offer multiple interesting macroeconomic readings, including EU and German Q2 GDP and US Retail Sales, although the calendar will remain empty Monday.

The EUR/USD pair fell for a third consecutive week, and while dollar's rally seems overstretched, there are no technical signs of a reversal just yet. In the daily chart, technical indicators head south almost vertically, now nearing oversold readings, while the price develops far below all of its moving averages, with firm bearish slopes and the closest being the 20 DMA now in the 1.1620 price zone. The pair has closed the week below the 1.1440/60 region, which was a major resistance between 2015 and 2017, which means that, as long as it stands below it, chances of an upward correction are quite limited. In the shorter term, and according to the 4 hours chart, the risk is also skewed to the downside, as technical indicators are consolidating in extreme oversold readings, while the 20 SMA turned south almost vertically, over 150 pips above the current level.

Support levels: 1.1385 1.1350 1.1320

Resistance levels: 1.1440 1.1490 1.1520     

View Live Chart for the EUR/USD

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