EUR/USD Daily Forecast – Volatility Drops as US Traders Celebrate 4th of July

The Case for a Turn in the Dollar

In yesterday’s forecast, I argued that EUR/USD might be near a bottom. I still support this view and here are the reasons why.

The current bounce in the dollar was triggered by news over the weekend that trade talks between China and the US are progressing. This caused a correlated move across the financial markets.

Treasury yields bounced higher with the 10-year rallying from a psychological 2% yield. Gold prices fell back below $1400 after a significant technical breakout in the prior week. Equity markets fell under a bit of pressure with the S&P 500 falling back from major resistance found on the larger time frames. And of course, the dollar index (DXY) recovered back above its 200 DMA.

Most of these moves have already been wiped out. The 10-yield has dropped below 2% which I consider to be very significant. It is currently at levels not seen since the fourth quarter of 2016.

The other markets have reversed also. Gold is back above $1400 and SPY broke to a record high yesterday and touched the psychological $300 price point. I believe this suggests that the markets don’t think there will be a resolution to the trade war anytime soon and that this issue won’t impact the Fed’s decision in a positive way at the July meeting.

I do think it is important to look at both sides and an argument can be made for a weaker dollar. Specifically, the divergence between the dollar and the above-mentioned instruments. After all, the dollar has not reversed its gains in the manner that the other assets have reversed.

However, with the current fundamental backdrop, it does not seem reasonable to me to expect EUR/USD to fall much further. After all, the pair trades a mere 1.5% from multi-year lows. Speculating a decline to a two-year low in EUR/USD doesn’t make much sense to me. Even considering how aggressive the markets are pricing in easing measures for July.

Technical Analysis

As mentioned in yesterday’s daily forecast, there is a notable confluence of support in EUR/USD within close proximity.

The area consists of the 100-day moving average, a horizontal level at 1.1264 and the lower bound of a rising trend channel.

To the upside, I see the first hurdle for bulls at 1.1305. This level held the pair lower yesterday.

Friday’s NFP figures should offer some volatility, in the meantime I think the pair will continue to consolidate within a range.

Bottom Line

• Major support in play this week near 1.1264.
• Price action in correlated instruments tells me the markets aren’t convinced of a near-term trade war resolution.