EUR/USD Forecast: Ready to rally? US political mess, coronavirus, bounce at critical support pointing up

After correcting with a fall of over 200 pips, EUR/USD could be gearing for another move up – and for good reasons. 

First and foremost, talks between Democrats and Republicans on the next relief package are stuck. Speaker of the House Nancy Pelosi does not expect progress this week and White House Chief of Staff Mark Meadows – a fiscal hawk – opposes surpassing $1 trillion in spending. 

Federal unemployment benefits worth $600/week have expired last week and they may already be dragging down consumption. Calculations show this top-up is worth more than 5% of Americans' disposable income:

The longer the impasse extends, the greater the damage to the US economy, potentially prompting the Federal Reserve to act. For now, officials at the central bank are reluctant to act. Charles Evans, President of the Chicago branch of the Federal Reserve, said the ball is now in Congress' court.

Nevertheless, the pressure to add more monetary stimulus – such as pushing the yield curve lower – may grow. Depressed returns on US debt, may, in turn, weigh on the greenback.

Another factor weighing on the dollar is data – while the ISM Manufacturing Purchasing Managers' Index beat expectations with 54.2 in July, the employment component remained well below 50 – implying more firing in the industrial sector. Factory Orders figures for June are awaited, while speculation ahead of Friday's Non-Farm Payrolls is rising. 

See US Manufacturing PMI Rebounds to 16 Month High in July:  Employment trails general improvement

The good news from America is the drop in new coronavirus statistics – yet that is likely due to the weekend effect. Tuesday's figures may continue showing a flattening of the cases curve, yet mortalities are set to bounce back above 1,000. 

In the old continent, several countries are experiencing flareups, but the situation seems under control. The highest number of new cases per 100,000 is in Spain – around 60, yet this is far from being concerning. The number of the unemployed surprisingly dropped by nearly 90,000 in the eurozone's fourth-largest economy in July. 

Overall, the dollar has reasons to fall while euro bulls seem to have little to worry about.

EUR/USD Technical Analysis

Euro/dollar has bounced off 1.17 – a level that supported it also in late July and now turns into a double-bottom. In addition, that level is where EUR/USD launched at, back in 1999. While upside momentum on the four-hour chart vanished, the currency pair swiftly recaptured the 50 Simple Moving Average. 

EUR/USD is battling 1.1780, a cap on the way up. It is followed by 1.1805, which had a similar role last week. The higher levels to watch are 1.1850 and 1.1909.

Initial support is at 1.1735, where the 50 SMA hits the price, followed by 1.17 mentioned earlier. Further down, 1.1625 and 1.1540 await it. 

More Where next for the dollar, stocks and the US economy after downbeat data and the Fed