EUR/USD Forecast: Three reasons why this rally may reach its limits soon

It took the world's most popular currency pair five attempts – but it finally broke above 1.10, hitting the highest in two weeks. 

Here is what has been going on and three reasons why the rally has little room to run.

1) Trade sentiment improved – but may turn negative

The upward move is mostly driven by US Dollar weakness. The safe-haven Greenback is sold off amid hopes for a US-Sino trade deal. The world's largest economies may agree on a "currency pact" that will control the movements of the Chinese yuan. Moreover, the US is set to accept to lift some restrictions from Huawei – the Chinese telecom giant suspected for working for the government – and also refrain from slapping new tariffs next week. Beijing has already committed to buying more US agricultural goods.

The upbeat news has come after earlier reports suggested the sizeable Chinese delegation will leave Washington after only one day of talks. While these stories have been dismissed, it is essential to remember that President Donald Trump aims for a broader deal – tackling sensitive issues such as intellectual property and government planning. The talks may still break down in acrimony.

Chinese Vice Premier Liu He will meet US Trade Representative Robert Lighthizer later today in Washington for the first high-level talks since the summer and markets are eyeing every headline. A recent deterioration in sentiment may send EUR/USD down.

The Federal Reserve is also watching trade developments. The Fed's meeting minutes from the September decision have shown that policymakers remain concerned about trade relations. If relations continue deteriorating, the chances that the Fed cuts rates later this month are set to rise. An accord may push the Fed to hold its fire. 

The minutes also revealed that members agree that the US economy is doing well but that global headwinds pose a risk to growth. However, they were split on what to do next. The hawkish members wanted the Fed to communicate when it would halt reducing rates. The doves saw rising indications of a recession on the horizon and cited low inflation as a reason for further easing.

Fresh Consumer Price Index (CPI) figures for September are due out later today. Core inflation is expected to rise by 0.2% monthly and remain at 2.4% yearly. Any deviation may rock markets.

See US CPI Preview: Economic growth, not prices is the key

Trump's impeachment inquiry has moved to the back burner amid trade headlines. However, House Democrats will hear move evidence today, and significant headlines may rock markets. 

2) Troubles in the old continent 

The common currency is benefitting from the weakness of the Dollar but has issues of its own. German trade figures have shown a drop of 1.8% in exports in August. French Industrial Production fell by 0.9%, also short of early estimates. Investors fear that the weakness in the manufacturing sector will spread to services. Consumers remain buoyant. Concerns about the bloc's economies may return to weigh on the euro. 

The gap between the sectors is mirrored in the European Central Bank. President Mario Draghi's decision to restart Quantitative Easing has angered the hawks, which have made their differences public. The latest comes from the Financial Times, which has reported that Draghi ignored expert advice when pushing for the resumption of bond buying. The leak – presumably from the hawks – adds to public denouncing of the move. Peter Praet, the former Chief Economist for the bank, has hit back by calling the hawks remain silent.

3) EUR/USD nears overbought conditions

EUR/USD has broken above the 200 Simple Moving Average on the four-hour chart and enjoys upside momentum. The Relative Strength Index (RSI) is getting closer to 70. If it continues higher, it will have entered overbought conditions – implying a potential drop. The picture is currently bullish for EUR/USD.

Initial resistance awaits at 1.1025, which capped the currency pair in late September. Next, we find 1.1075, which was a resistance line in mid-September. The stubborn 1.1115 level that dates back to earlier last months is critical resistance. 

The broken 1.10 line switches to support. It is followed by 1.0965, which provided support earlier this month and also in late September. Further down, the weekly low of 1.0940 provides further support before 1.0905 and 1.0879.