EUR/USD Forecast: rallies are expected to be limited

The resurgence of trade jitters on the US-China trade front in response to President Trump’s recent comments have weighed on US money markets and forced yields of the key US 10-year reference to abandon de area of recent tops near 2.15%.

The down move in yields hurt the sentiment in the buck and sparked a moderate correction lower in the US Dollar Index (DXY), which in turn, motivated EUR/USD to put further distance from recent weekly lows in the 1.1200 neighbourhood.

The current USD-led squeeze higher, however, should be seen as corrective only and therefore short-lived, as market participants continue to adjust to the likelihood of a fresh wave of ECB easing in the short-term horizon. In fact, new policy measures – including potential rate cuts, the restart of QE and changes in the bank’s forward guidance – are most likely to be announced at the July/September meetings.

 

Thus, bullish attempts in EUR/USD face the next relevant hurdle in the 1.1280/90 band, where converge the 21-day SMA and monthly peaks. A surpass of this area is needed to alleviate immediate downside pressure and re-shift the focus to the critical 200-day SMA in the 1.1320 region ahead of June’s high near 1.1420. On the downside, the loss of the key support at 1.1200 the figure should pave the way for a test of the 1.1181/76 band.