EUR/USD Forecast: Three reasons for the downfall – nearing two-year lows

EUR/USD has been unable to stop falling – and there is no respite in sight. There are three reasons for the fall.

1) German slowdown deepening

The latest blow came from Markit's German Purchasing Managers' Index (PMI) for the manufacturing sector. Europe's "locomotive" may have entered a recession according to the forward-looking survey. It has come out at 43.1 points, significantly lower than expected and far below the 50-point threshold separating expansion from contraction.

Germany's services PMI has met expectations, but the data for both French sectors fell short. Slowing global growth is taking its toll and causes concern also at the European Central Bank, which is set to announce its decision on Thursday. Most analysts expect the ECB to signal a rate cut in September – going below the negative deposit rate of -0.40% – but after the recent indicators, it may act already now. 

Speculation about the ECB's decision will likely remain the main market mover.

2) USD rising amid trade talks

EUR/USD had already begun suffering on Tuesday due to US dollar strength. The greenback has enjoyed the US-Sino announcement that high-level discussions will resume next week in Beijing – the first since early May. The fresh face-to-face talks raise hopes for a trade deal – or a prolongation of the truce announced late last month. 

The Federal Reserve – which is set to cut interest rates next week – has cited trade as a critical reason for adding stimulus. An improvement in the market mood reduces the chances of substantial rate cuts and thus supports the greenback.

Later today, Markit's flash US PMIs and new home sales are of interest as markets are trying to estimate what the Fed will do.

3) Technical – EUR/USD has lost uptrend support

EUR/USD has been trading above an uptrend support line for over a month – until it has been broken decisively in recent days. The currency pair initially dipped lower, but the move turned into a total meltdown. 

EUR/USD may experience a temporary bounce due to oversold conditions – the Relative Strength Index (RSI) is below 30 – indicating oversold conditions. Nevertheless, it is suffering from considerable downside momentum and trades below the 50, 100, and 200 Simple Moving Averages.

Some support awaits at 1.1120, which has supported it in late May. The next cushion is critical – 1.1107 is the 2019 trough and the lowest since 2017. A breakdown may open the gates to 1.1025 and 1.0900. 

Weak resistance awaits at 1.1145 which has provided support recently and capped EUR/USD in late May. Further up, 1.1180 is where the now-broken uptrend support line was formed. It is closely followed by 1.1195 which was a swing low in mid-July, and by 1.1240 which separated ranges earlier this month.