- EUR/USD has invalidated crucial falling trendline resistance.
- Trade tensions, however, could cap upside around the 50-day MA at 1.1249.
- Yield differentials may narrow in the EUR-positive manner.
EUR/USD has violated key descending trendline, but the 50-day moving average (MA) at 1,1249 may prove a tough nut to crack amid trade tensions.
The currency pair closed at 1.1232 on Friday, confirming an upside break of the trendline connecting March 20 and April 17 highs, which had reversed gains on May 1. The breakout, therefore, may entice buyers.
The escalating US-China trade tensions, however, could keeps the 50-day MA hurdle of 1.1249 intact.
Having increased tariffs on $200 billion worth of Chinese goods from 10% to 25% on Friday, Trump warned China against imposing retaliatory tariffs. The US President said on Saturday that he would love to collect bigger tariffs if China retaliates.
Meanwhile, the world’s second largest economy warned Trump against underestimating its endurance to fight a prolonged trade war.
With trade tensions escalating, the Chinese yuan fell to the lowest level against the US dollar since Jan. 3 in Asia and could suffer further losses, keeping the US dollar bid across the board.
Also, the European stock markets could trade in the red, tracking the near 1% drop in the S&P 500 futures. The resulting selling in EUR/JPY could also cap upside in the EUR/USD pair.
That said, benign inflation reported by the Labor Department on Friday is seen adding pressure on the Fed to cut rates. As a result, the spread between the two-year US and German government bond yield could slide in the EUR-positive manner, restricting the downside in EUR/USD. All-in-all, the shared currency is seen trading in a sideways manner on the first trading day of the week.
As of writing, the pair is trading largely unchanged on the day at 1.1232.
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