EUR/USD Analysis: US-China tensions prompt some profit-taking ahead of NFP

The EUR/USD pair continued with its struggle to find acceptance above the 1.1900 mark and witnessed a modest pullback from two-year tops, set during the first half of the trading action on Thursday. A modest US dollar rebound was seen as one of the key factors that prompted some profit-taking taking amid near-term overbought conditions. The greenback found some support on Thursday following the release of better-than-expected US Initial Weekly Jobless Claims, which came in at 1.186 million as compared to 1.415 million expected and the previous 1.43 million.

However, concerns about the pace of the US economic recovery due to the ever-increasing COVID-19 cases, the stalemate in the US Congress over the next round of fiscal stimulus package and declining US Treasury bond yields capped the USD gains. This, in turn, helped limit any meaningful downside for the major. The pair finally settled around 60 pips off daily lows, albeit lacked any strong follow-through, instead met with fresh supply during the Asian session on Friday. The USD drove some haven bids amid a further escalation in tensions between the US and China.

The US President Donald Trump signed executive orders banning US transactions with China's tech giant Tencent – which owns the popular WeChat app – and ByteDance – the owner of video-sharing app TikTok. The announcement overshadowed upbeat Chinese trade balance data and took its toll on the global risk sentiment, which forced investors to take refuge in traditional safe-haven assets. The pair slipped back to the 1.1835-30 region, though the downside seems limited as investors might refrain from placing aggressive bets ahead of the closely watched US monthly jobs report.

The headline NFP is expected to show that the US economy added 1.6 million jobs in July as compared to 4.8 million in the previous month. Meanwhile, the unemployment rate is expected to edge lower to 10.5% from 11.1%. Against the backdrop of Wednesday's disappointing ADP report, a weaker reading will suggest that the US labour market recovery was faltering and prompt some fresh USD selling. Apart from this, the broader market risk sentiment will further contribute to produce some meaningful trading opportunities on the last trading day of the week.

Short-term technical outlook

From a technical perspective, the pair’s inability to capitalize on its move beyond the 1.1900 mark could be seen as initial signs of possible bullish exhaustion. However, it will be prudent to wait for some strong follow-through selling before confirming that the pair might have topped out in the near-term and positioning for any further corrective slide. In the meantime, a convincing break below the 1.1800 mark is likely to accelerate the slide towards weekly lows, around the 1.1760-55 region. Below the mentioned support, the pair might turn vulnerable to slide further to the 1.1700 mark, which if broken should extend the downfall towards the 1.1620-15 horizontal support.

On the flip side, any meaningful positive move beyond the 1.1900 mark now seems to confront some resistance near the 1.1935-40 region. Sustained strength beyond will now set the stage for a move towards reclaiming the key 1.2000 psychological mark with some intermediate resistance near the 1.1975-80 region.