EUR/USD Forecast: Only a temporary calm between the summer storms

The EUR/USD is trading in a narrow range around 1.1700 in a calm session, understandable and typical ahead of the US Non-Farm Payrolls. The American jobs report is expected to show a gain of 188,000 positions in May after a disappointing 164,000 rise in April. Wages carry expectations for an increase of 0.2% MoM and acceleration from 2.6% to 2.7% YoY. The Federal Reserve is set to raise interest rates in the upcoming June meeting, and it would take horrible figures to cause some second thoughts.

See the preview: Volatility coming, but no lasting effect expected

And as the title says, the volatility may not last for too long. Markets did not have time to digest the Italian political developments as trade issues grabbed the headlines. The US implemented the tariffs on steel and aluminum on Canada, Mexico, and the European Union. Angry responses came, and the EU is working on retaliatory tariffs which may kick in within 30 days.

The worsening trade relations, seen as a trade war, may weigh on global growth. For the EUR/USD, they could result in a fall of the pair as money flows into the relative safety of the US Dollar and away from the euro-zone. 

European politics

Returning to European politics, a new government is due to take the reigns later in the day. The 5-Star Movement, the League, and Italy's President Sergio Matterella have agreed on the composition of the new government. A more pro-European economist, Giovanni Tria,  will assume the position of Finance Minister and Giuseppe Conte will become Prime Minister.

Earlier in the week, the week, the EUR/USD plunged to a 10-month low of 1.1510, and Italian bonds soared on the specter of new elections. Given the anger by the President rejection of a Euroskeptic finance minister, fear emerged that the polls would be a de-facto plebiscite on euro-zone membership. 

The formation of a new government alleviates these fears, but a populist government bent on enlarging the deficit would clash with Germany and France. Also, it would open the door to further confrontations around spending. 

In Spain, Prime Minister Mariano Rajoy is on his way out after a majority was reached against him. While Spanish stocks suffered, the Euro was not affected. The incoming PM Pedro Sánchez is committed to the budgets recently passed and is also pro-European. In general, Spaniards are traditionally fans of the European project. 

Additional political developments and trade-related headlines could swirl the pair after the dust settles from the Non-Farm Payrolls.

EUR/USD Technical Analysis

The EUR/USD is off the lows and also above the steep downtrend resistance that capped it in recent weeks. However, the RSI is no longer in oversold territory, thus pointing to further losses. Momentum remains firmly to the downside. 

Support awaits at Friday's close at 1.1648. It is followed by 1.1610 which was a stepping stone on the way down, by the November low of 1.1550, and finally by the fresh 2018 low of 1.1510.

On the topside, 1.1726 was the high point on Monday, 1.1767 was yet another stepping stone on the way down, and 1.1822 was the May 9th swing low.

More: EUR/USD path of least resistance is down on Non-Farm Payrolls day — Confluence Detector