EUR/USD Daily Forecast – Rally Stalls as Trade War Fears Lessen

Chinese yuan consolidates losses

It’s not often that EUR/USD traders look to the Chinese exchange rate for clues on where the single currency might go next, but such is the case this week as the trade battle between the US and China is dominating the financial markets.

Initially, it was a tweet from the US president about more tariffs that spooked the financial markets. A drop in the yuan below the key 7 level versus the greenback back intensified fears.

The decline in the Chinese currency stirred up speculation that China is fighting back by devaluing the yuan. However, it seems that there is an attempt to contain the drop in the yuan as the exchange rate has fallen into a range.

I think it is important to have a correct assessment of sentiment here. While equities have bounced back and the dollar decline looks like it has stalled out a bit, I don’t think the backdrop has changed in such a manner that warrants a reversal to erase the price action across financial markets in the early week. At least not in the near-term, and certainly not without further positive developments on the trade war front.

At the same time, it is difficult to ignore the technical outlook for EUR/USD which strongly suggests that the rally has stalled.

Technical Analysis

There is quite a bit of resistance in play here across the daily and 4-hour charts. On a daily chart, the 50 and 100-day moving averages have converged to create a strong confluence around 1.1230.

Although there was an intraday push above the resistance level, the pair closed below it on an intraday basis. Not only that, a doji candle was posted in the process which signals exhaustion and builds towards the case for a pullback.

On a 4-hour chart, the pair also faces resistance from the 200-period moving average. As well, a bearish engulfing candle printed shortly after the European open.

So there is quite a bit of technical evidence that seems to suggest we push lower here. On the other side, the strongest argument for a bullish case is the momentum which with the pair rallied in the early week. It clearly suggests a reversal of the near-term trend.

Also, the pair has retaken the 100 moving average on a 4-hour chart. I think this is a good indicator to watch in the session ahead in assessing if EUR/USD has already printed a high for the week.

Bottom Line

• Several technical indicators suggest EUR/USD may have topped out.
• Trade war developments can reignite volatility.
• The economic calendar is light for the session ahead, the highlight will likely be a speech from Fed member Evans.