EUR/USD Daily Forecast – Euro Threatens Yearly Lows

Return of Risk Appetite Encourages EUR/USD Selling

Market sentiment shifted decidedly earlier this week after positive comments from Trump regarding the trade war with China. The S&P 500 has recovered most of its losses for the month, the dollar has strengthened, and bonds yields have bounced.

A rise in bond yields is usually good for the greenback, and this week has not been an exception. The 10-year Treasury yield bounced higher this week and is on pace to close the week for a small gain to end a prior 4-week losing streak.

Also weighing on EUR/USD is that the single currency is commonly used as a funding currency for high yielding assets. However, looking at the Euro’s performance for the week against 6 of its most commonly traded counterpart currencies, the drop in the exchange rate has more to do with a stronger dollar than anything else.

As the EUR/USD decline is starting to get a bit oversold, at least on the shorter time frames, it will be interesting to see how the risk rally holds up today. The S&P 500 trades near resistance from the upper bound of a range that has held it lower for most of the month. It might struggle to break above it in the absence of a catalyst. Such a scenario could trigger a small relief rally in EUR/USD.

Technical Analysis

EUR/USD shows a bit of support at 1.1033 which marks the July low. The pair is showing potential for a bounce. However, it would need to get above 1.1050 to take the recovery seriously.

As mentioned, the S&P 500 is facing fairly significant resistance, a pullback in the risk rally stands to trigger a recovery in EUR/USD. In such a scenario, there is resistance at 1.1053. A stronger level is found at 1.075.

In a bearish scenario, I expect a break below 1.1033 might accompany further losses below the 1.1000 handle to take the exchange rate to levels not seen since May 2017.

Bottom Line

• EUR/USD has dropped every day the week thus far alongside a recovery in risk assets.
• Technical indicators show the pair oversold and there is some potential for a bounce.
• US indices are facing technical resistance and a pullback in equities can encourage EUR/USD buyers by correlation.