EUR/USD Forecast: Ready for the next leg down as the trade war intensifies

Buy the safe-haven US dollar as trade tensions mount? Or sell it as US bond yields? That is the dilemma for EUR/USD traders after China has retaliated to President Donald Trump's recent tariffs announcement.

The world's second-largest economy has allowed its currency to a decade low against the dollar. One greenback now buys over 7 yuan in a move that counters American tariffs and supports Chinese exporters. However, China is unlikely to let its currency fall too far – as that may trigger capital outflows that may endanger the economy. 

Beijing has also instructed its state-owned companies to halt the buying of US agricultural goods – one of the politically sensitive issues that Trump has complained about. Moreover, reports suggest that China may suspend further trade talks.

The escalation in trade wars has pushed global stocks lower and raised demand for bonds. US benchmark 10-year Treasury bond yields have dropped to new lows around 1.75% – making the greenback less attractive and pushing USD/JPY below 106. The yen is the ultimate safe-haven currency, but the dollar also sees demand in times of trouble. The American currency has been gaining against commodity currencies.

EUR/USD torn between two forces

Where is EUR/USD in the mix? Somewhere in the middle. At the time of writing, the balance between safe-haven demand that boosts the dollar and falling yields that weigh on are offsetting each other. 

When the balance is broken, it will likely be to the downside for EUR/USD. The European economies are more vulnerable to trade tensions and are at a worse spot than the US. Friday's US Non-Farm Payrolls report was upbeat – the economy gained 164K jobs in July and wage growth accelerated to 3.2% year on year. Under these conditions, the Federal Reserve is unlikely to cut interest rates again, while the European Central Bank has already pledged to do so.

Another top-tier indicator is due out today – the ISM Non-Manufacturing purchasing managers' index for July. America's services sector has been enjoying solid growth in June with the gauge scoring 55.1 points. A similar read is likely now. For comparison, the euro-zone final services sector read for July will likely be confirmed at 53.3 points.

Overall, trade tensions are likely to dominate with brief influences from economic data. 

EUR/USD Technical Analysis

EUR/USD has briefly broken above the 50 Simple Moving Average on the four-hour chart but fell back below it. Downside momentum is persisting while the Relative Strength Index is balanced. Overall, the bears are leading against the bulls.

Some support awaits at 1.1110, which provided some support in late July. The previous 2019 low of 1.1101 is the next level to watch. Lower, 1.1070 was a stepping stone for the pair on its way up, and the final line to watch is 1.1027 – the fresh 2019 trough.

Resistance awaits at 1.1135, which was the daily high, followed by 1.1165, which capped EUR/USD last week. Next, we find 1.1190 which was a swing high in late July, followed by 1.1245.