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EUR/USD Forecast: U-turn at the double-bottom or another dead cat bounce?

  • The EUR/USD reached new 2018 lows at $1.1822 but is bouncing back amid an improved mood.
  • US bond yields are rising, and markets are bracing for an Iran deal without the US.
  • The technical picture shows that the pair is in deeply oversold conditions.

The EUR/USD is trading around $1.1860, flat on the day and after having reached a low of $1.1822, the weakest level since December 22nd, 2017. The bounce from the lows is a result of a better mood in markets in the day after US President Donald Trump abandoned the Iran deal.

Trump-Iran wobbles

In a dramatic statement on Tuesday, Trump announced the exit of the US from the JCPOA as the deal is officially known. He also announced the renewal of sanctions on Iran and new penalties to come. Some of the moves have an immediate effect, and some will take several months to kick in.

The decision imperils the deal as access to the US was a big economic prize for the Middle Eastern country. So far, Iran, Germany, France, the UK, Russia, and China all intend to stick the agreement, and the US is open to new negotiations. Yet as long as the US stays out, the contract could crumble.

The initial reaction was a downfall in stocks and a risk-off environment. However, as time passes by and the deal remain intact, the mood has turned more positive, and this is favorable for the Euro against the US Dollar and even more against the Yen.

US yields, EZ disappointments

Another significant factor in play is the fresh rise in US bond yields. The 10-year benchmark Treasury yield topped 3% once again. This comes ahead of an auction of fresh 10-year bonds later in the day and as the fiscal needs of the US are increasing. The advance in yields pushed the pair to the lows earlier.

In the old continent, Wednesday morning saw two more disappointing figures: French Industrial Output dropped by 0.4% in March against a rise of the same scale that was expected. Italian Retail Sales fell by 0.2% against an increase of 0.1% that was on the cards for March. Not all euro-zone data points are weak, but the majority of the economic gauges fell short of expectations, painting a picture of a more significant slowdown that expands beyond the first quarter. 

Later today, the US publishes its Producer Price Index (PPI) numbers which carry expectations for a rise of 0.2% MoM on both the headline and the core numbers. The publication serves as a warm-up to the all-important Consumer Price Index (CPI) due on Thursday.

The 10-year bond auction mentioned earlier is due at around 17:00 GMT. A high yield in the primary market may push yields higher also in the secondary market and consequently, add fresh wind the Dollar's sails.

EUR/USD Technical Analysis

EUR USD Technical analysis May 9 2018

The EUR/USD continues trading in the steep downward channel. The plunge seen on Tuesday kept the channel intact. Momentum is to the downside, and the pair is well below the 200-day Simple Moving Average. 

On the other hand, the RSI is at 24.6 at the time of writing, well below the 30 level that points to oversold territory. The phenomenon has been going on for several days, and so far the pair has not bounced. Will we see it move up now? 

The new low of $1.1822 is a double-bottom as the pair marked a low of $1.1817 on December 22nd, 2017, just five pips below the recent trough. A bounce-back would confirm the double-bottom while a fresh fall would repeat the past "dead cat bounce" pattern of shallow bounces that precede further falls. This has characterized the pair's trading in the past few weeks.

Immediate support awaits at $1.1817, followed by $1.1715 which was a low point in November. Resistance is at $1.1915 that was the low point in January, and the next level is the round figure of $1.2000.

More: EUR/USD may have finally found a bottom, but if not, $1.1775 is next — Confluence Detector

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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