EUR/USD Forecast: German jitters push the pair lower within the wedge

  • The EUR/USD begins Q3 on the back foot, mostly due to the German crisis.
  • PMI data and trade-related news will add to market movements. 
  • The technical picture is mixed after the recent up and down moves.

The EUR/USD is on the back foot once again, trading below 1.1650 and it's mostly around Germany. On Friday, Chancellor Angela Merkel came home from Brussels with an agreement on migration and the news sent the Euro up. It had seemed that her sister Bavarian CSU party was on board. However, CSU leader Horst Seehofer threatened to resign on Sunday amid dissatisfaction with the deal.

Merkel said the political situation is serious. Talks between both politicians are due later in the day. Merkel, the symbol of stability in Europe's largest economy, may lose her job if the crisis is not defused.

The pair is also dropping due to fresh concerns about trade. The US is set to impose tariffs on $50 billion worth of Chinese goods on Friday and the world's second-largest economy is on course to retaliate. The lack of any resolution sent Asian equities lower and triggered a risk-off environment which is beneficial to the US Dollar against most currencies, with the exception of the Japanese yen. US President Donald Trump called on OPEC to produce more oil. This interventionist comment did not help alleviate trade tensions.

Markit's purchasing managers' index for Spain came out at 53.4 points, marginally below expectations. The figure for Italy was 53.3 points, above 52.7 expected. 

The ISM Manufacturing PMI is published later in the day. The headline will provide the first hint toward the Non-Farm Payrolls report on Friday. The Prices Paid component serves as a gauge of inflation. It is important to note that the data is released just as closely watched match is played at the World Cup: Brazil vs. Mexico. Many traders will be glued to the screens, and this may decrease liquidity and may cause jittery movements. 

See: ISM Manufacturing PMI Preview: Brazil's game at the same time matters no less than the numbers

EUR/USD Technical Analysis

EUR USD technical analysis July 2 6 2018

The EUR/USD is trading in a narrowing wedge or triangle. It is setting lower highs and higher lows. This narrowing range usually results in a decisive move. But to which direction? The Relative Strength Index on the four-hour chart does not send a clear signal. Momentum points to the upside but is not as convincing as it used to be. The pair trades above the 50 Simple Moving Average but below the 200-day one. 

Support awaits at 1.1600, a round number and a level that capped the pair in late June. Further down, 1.1540 was a line of support that defended the 2018 low of 1.1508. Even lower, 1.1480 was a line of resistance back in July 2017.

Looking up, 1.1675 served as resistance in late June and is followed by the June 25th high of 1.1720. Further above, 1.1850 was the swing high back on June 14th. 

More: EURUSD eases below 38.2% Fibonacci; triple bottom formation in the process

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