EUR/USD Forecast: Three reasons for the downfall – levels to watch

The safe-haven US dollar tends to retreat in response to optimism – but not markets are questioning their previous bets on the Fed cutting interest rates. That is the first reason for EUR/USD's downfall.

1) Trade truce is USD-positive

US President Donald Trump and his Chinese counterpart Xi Jinping have agreed to resume to trade talks and to refrain from imposing new tariffs while negotiations continue. The leaders of the world's largest economies have met over the weekend on the sidelines of the G-20 Summit in Osaka, Japan, and provided some relief for markets. The US has also agreed to allow Huawei – the Chinese telecommunications giant – to buy US equipment.

Stocks have risen once markets opened in Asia and such gains are typically accompanied by a drop in the safe-haven US dollar. However, investors are speculating that the trade truce will lower the chances of a deep 50 basis points interest rate cut by the Federal Reserve and also reduces the probability of further monetary stimulus later this year. Yields on US bonds have risen – boosting the greenback.

2) EU indecision

German Chancellor Angela Merkelhas put forward Franz Timmermans – the center-left Dutch candidate – as president of European Commission. However, allies of her center-right group have rejected the idea.

Heads of state continue discussions and are set to divvy up additional jobs – with the post of the European Central Bank's president being the most important one for euro trade. 

See EU Summit preview: Four EUR/USD scenarios for the selection of the new ECB President

3) Euro-zone weakness

Euro bulls also have to contend with Markit's forward-looking purchasing managers' indices. Spain's PMI dropped to 47.9 points in June –worse than expected and reflecting contraction. 

Data from Italy, France, and Germany are due shortly, and they may weigh on the single currency. Later, euro-zone unemployment may provide some relief. 

What's next? 

The focus later shifts to the US with the ISM Manufacturing PMI – the first hint towards Friday's critical Non-Farm Payrolls. A minor decrease is on the cards. 

See US Manufacturing PMI Preview: Trade is the measure of all things

All in all, politics remain central and may continue weighing on the currency pair, yet data is also of high importance. 

EUR/USD Technical Analysis

EUR/USD has dropped below 1.1350 that had provided support last week. It has also fallen below the 50 Simple Moving Average Average on the four-hour chart. The Relative Strength Index leans lower – but above 30 – not oversold just yet and allowing for more falls.,Downside momentum is accelerating. All in all, the technical picture has worsened.

Initial support awaits at 1.1320, which the pair briefly breached earlier. The 100 SMA awaits at 1.1310, and the next level to watch is 1.1270, which was a stepping stone on the way up last week. It is followed by 1.1250 and 1.1200.

Looking up, 1.1350 turns into resistance, and last week's stubborn cap of 1.1390 is next. The three-month high of 1.1410 is critical resistance. 1.1445 awaits further up.