EUR/USD bulls look to 2018-2019 down channel, but ECB lurking


  • EUR/USD upside potential limited on central banks race to the bottom. 
  • Key resistance is 1.1360/77, the 2018-2019 down channel and the 55-week ma.

EUR/USD is trading between a range of 1.1181 and 1.1233, down -0.10% on the session as markets move into consolidation for the most part with a slight recovery in risk appetite. EUR/USD has been in favour this week following a fall out in the EM-FX space as investors unwind their carry trades and buy back the euro looking to park their idle capital in safer havens, such as gold.

On the economic front, the eurozone is a basket case which the market has long been aware of, expecting the ECB to act promptly. This meant that the market was already heavily short euros and when covering the shorts, the euro took off. EUR/USD rallied from a low of 1.1027 to a high of 1.1249. 

Looking ahead, although markets now appear to be recovering somewhat, America and China remain locked in a perilous trade war with no end in sight. Should  10% tariff on some $300 billion worth of Chinese imports go ahead in September, we can expect to see more turmoil. But given how far the euro has already come  in an environment where core eurozone yields are falling to all-time lows, and given the Dollar's safe-haven status while the US economy doesn't necessarily warrant another precautionary rate cut from the Fed, (something which Bullard explained earlier this week), it could be a tail of two stories when it comes to EUR/USD, leaving room for a surge back to the downside for the eurozone is equally at risk to a slowdown as a major trading partner with China. 

Currency wars to weigh on the euro initially

Moreover, as analysts at ING Bank warned, "It does not seem unreasonable to suppose that China might then retaliate by engineering a substantial devaluation of its currency. After all, a cheaper renminbi would go a long way toward offsetting the impact of Trump’s tariffs on the prices of Chinese goods in the US," which in turn would only make the Dollar more attractive against a backdrop of easing central banks with the both the ECB and RBA set to succumb to gravitational pull on banks next. However, when the tables are turned as the US Treasury seeks to buy EUR/USD and sell USD/JPY, then we will see a different outcome with the US soft Dollar policy taking fold. 

EUR/USD levels

Analysts at Commerzbank explained that EUR/USD’s up move is approaching resistance at 1.1285 and the 200-day moving average at 1.1297:

"Key resistance is 1.1360/77, the 2018-2019 down channel and the 55 week ma. A weekly close above this latter level is needed for us to adopt an outright bullish stance. Dips lower are likely to find some support circa 1.1150/06. Key support is the 1.0967 2018-2019 support line and below here lies the 78.6% retracement at 1.0814/78.6% retracement."

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