EUR/USD Forecast: Looking vulnerable as rising on trade troubles reaches its limits

The euro's ability to enjoy the misery of others may have reached its limits – is it ready for a more significant fall?

On Friday, an escalation in tariff threats has sent the dollar lower alongside falling US bond yields – and EUR/USD shot higher. On Monday, US President Donald Trump and Chinese Vice Premier Liu He called for calm – yields rose and EUR/USD dropped.

But now, the media in the Asian economic giant has expressed doubts about Trump's assertion that China wants a deal. And while bond yields are falling again – EUR/USD remains stuck at 1.1100. 

Are investors getting to grips with the economic pain that Germany and other euro-zone economies suffer as a result fo the US-Sino tussle?

As we have noted several times, the German economy highly depends on Chinese imports of its goods. Final figures confirm that the economy of Europe's "locomotive" contracted in the second quarter by 0.1% and remained stagnant on a yearly basis. More recent data has also shown pessimism. The IFO Business Climate Index has dropped to 94.3 points in August – more than 95.1 expected and well below 95.7 recorded in July. 

More: Euro-zone economy: New German government needed to spend and lift the euro

The common currency also fails to recover despite growing chances that Italy will soon have a new government. The 5-Star Movement and the Democratic Party have significantly advanced in their negotiations. Outgoing prime minister Giuseppe Conte – an independent – may hold onto his job. President Sergio Mattarella has agreed to extend the deadline to form a new government to Wednesday evening amid this progress.

Investors feared that Italy – the euro zone's third-largest economy – would face new elections that could result in Matteo Salvin's League party taking the reins. Salvini has clashed with the EU several times and may have broken Brussels' budgetary rules.

Developments around trade and Italian coalition talks are set to dominate trading today. However, a significant US indicator is due out – the Conference Board's Consumer Confidence Index for August. 

See US Conference Board Consumer Sentiment Preview: Jobs, jobs, jobs

EUR/USD Technical Analysis

EUR/USD has dropped back to the downtrend channel after breaking above it on Friday – a bearish sign. Momentum on the four-hour chart is still pointing higher, but it has weakened. The currency pair trades above the 50 Simple Moving Average – ut only just. All in all, the picture is mixed but the pair looks vulnerable.

Support awaits at 1.1095 which is the daily low. The next cushion is at 1.1050, which was the low point on Friday. The 2019 trough of 1.1027 is a critical support line. 1.1000 and 1.0960 are next.

Resistance awaits at 1.1115, which held EUR/USD down early last week. It is followed by 1.1130 that provided temporary support on Monday and by the recent peak of 1.1165.