EUR/USD Forecast: Why the dead cat bounce may make way for a fresh fall

One million coronavirus deaths – the world has reached that grim milestone and the focus on Europe is weighing on sentiment. That is only one of the reasons preventing EUR/USD from recovering and may bring it down to new lows.

After last week's downfall, the recovery looks like the "dead-cat bounce" pattern that often characterizes EUR/USD trading.

Christine Lagarde, President of the European Central Bank, expressed concern about the virus and the impact on the economy. Will the Frankfurt-based institution provide more stimulus? Reportedly, that is fiercely debated and the ECB remains split between hawks and doves. 

The bank also has to deal with weak inflation, and new statistics published on Tuesday are adding to the case for more accommodation that may weigh on the euro. Spain – with its capital Madrid being Europe's "ground zero" for the second wave – reported an annual drop of 0.4% in its Consumer Price Index in September. Germany publishes its figures later in the day, and they are expected to remain depressed as well.

COVID-19 infections remain elevated in the US as well, but the dollar's safe-haven status means it gains from such concerns. 

Source: FT

Moreover, the Federal Reserve seems reluctant to provide more stimulus. Most officials, including Chairman Jerome Powell, urged the government to provide more stimulus. Vice-Chair Richard Clarida and several other officials will speak on Tuesday and are likely to continue signaling that the ball lies in elected officials' court. 

Some hope for a deal between Republicans and Democrats pushed stocks higher and the dollar lower – but that is beginning to fade. 

Lawmakers are gearing up for a battle around the nomination of a new Supreme Court Justice as the clock ticks down toward the elections – and the first presidential debate. Incumbent Donald Trump faces challenger Joe Biden on Wednesday at 1:00 GMT. The former Vice President is leading in the polls but is considered an underdog when it comes to debating.

Will Trump close the gap with Biden? That would add uncertainty and potentially boost the safe-haven greenback as investors continue dreading the nightmare scenario of an inconclusive election and a constitutional crisis. 

2020 Elections: How stocks, gold, dollar could move in four scenarios, nightmare one included

Ahead of the debate, the Conference Board's Consumer Confidence gauge is set to show an ongoing recovery, in line with other economic indicators. 

See US CB Consumer Confidence Preview:  Neither happy nor sad

Overall, concerns about the situation in Europe and uncertainty about the elections may push EUR/USD down.

EUR/USD Technical Analysis

While momentum on the four-hour chart has flipped to positive, it remains weak. Moreover, EUR/USD is trading below the 50, 100, and 200 Simple Moving Averages, adding to the bearish case. 

The daily low of 1.1660 is only weak support. It is followed by 1.1625, a swing low from last week, followed by September's trough of 1.1615. Next, 1.1550 and 1.1480 date back to August. 

Some resistance awaits at 1.1685, the daily high. It is followed by 1.1730, which provided support last week, and then by 1.1755, a cushion from mid-September. Next up, 1.1785 and 1.1830 are the next lines to watch.