EUR/USD Forecast: Why this slide could be a buying opportunity, levels to watch

New week, new trend? After staging an impressive turnaround late last week, it seems that worries have taken over and are sending EUR/USD back down toward the lows. However, bad news could turn into good news.

The latest downbeat development to boost the safe-haven dollar came from Beijing. China reported weaker than expected increases in industrial output and retail sales, which piled on top of fears that the world's second-largest economy is suffering from another disruptive covid wave. Moreover, authorities seem reluctant to inject new stimuli.

In the US, investors are still trying to understand the plunge in consumer confidence. The University of Michigan's preliminary Consumer Sentiment Index gauge for August tumbled to 70.2 points – below the worst levels seen in the pandemic. Even if the data is skewed, it seems the world's largest economy is slowing down. That is bad news for the rest of the world.

However, last week's US economic releases also included hopeful signs of slower inflation. While the headline Consumer Price Index remained at 5.4% YoY – above expectations – Core CPI rose by only 0.3% MoM, below estimates. Inflation may be "cresting" ahead of a slide. 

If price rises are set to fall, the Federal Reserve could keep its monetary policy looser for longer – delay the tapering of its bond-buying scheme. That would mean printing more dollars, weighing on the value of the currency.

Printing of greenbacks is also in the realm of the government. Congress continues debating two spending packages, a smaller "hard" infrastructure bipartisan bill and more ambitious legislation backed only by Democrats.

While the sums are far from being finalized, trillions of dollars are on their way, and that could boost sentiment and lift the entire global economy. Investors have been waiting to see it to believe it, but they could begin watching Capitol Hill sooner rather than later. 

In the old continent, there are reasons to be cheerful about Europe's high levels of vaccination and lower caseload of COVID-19 infections. That is an advantage for the euro.

Source: FT

Overall, there are reasons to see Friday's upward move as the beginning of an uptrend and Monday's slide as a mere correction.

EUR/USD Technical Analysis

The Relative Strength Index on the four-hour chart has dropped below 70, thus exiting overbought conditions and allowing for fresh rises. The currency pair has also topped the 50 Simple Moving Average but still remains below the 100 and 200 SMAs. All in all, bulls are gaining ground.

Resistance awaits at 1.1805, which was Friday's high, followed by 1.1825, 1.1860 and 1.1910. All were stepping stones on the way down. 

Below the daily low of 1.1778, the next cushion is at 1.1770, where the 50 SMA hits the price. Further down, 1.1720 and 1.17 – the critical double bottom – await the bears.