EUR/USD: China factory deflation may keep a lid on gains

• EUR/USD’s candlestick arrangement on the daily chart indicates the risks are skewed to the upside.
• The upside, however, may remain elusive due to China’s factory deflation.  

EUR/USD charted a bullish outside bar candlestick pattern on Monday, but the upside could be capped by concerns of a deeper economic slowdown in China.

The pair eked out gains on Monday, engulfing Friday’s price action and signaling a resumption of the rally from the Sept. 3 low of 1.0926. Put simply, the path of least resistance is to the higher side – more so, as the  narrative is getting entrenched in the market that the EUR will pick up a strong bid if the European Central Bank (ECB) falls short of a Bazooka (rate cut and bond purchases) on Thursday.

So, while the risks are skewed to the upside, the gains could be capped by China’s economic slowdown. The data released at 01:30 GMT showed China’s producer price index (PP) fell 0.8% in August from a year earlier, having dropped 0.3% in July.

China’s factory deflation could hit the global economy via exports and is bad news for risk assets. Therefore, the US Dollar may remain bid in Europe due to the haven demand for Treasuries.

However, if investors buy risk, the EUR/USD pair could challenge the resistance at 1.1085 (the high of the Doji candle created on Sept. 5).

As of writing, the pair is trading at 1.1044, representing marginal losses on the day.

Technical levels