EUR/USD: Ready for a Sell-Off on Cyber Monday

FXStreet  |

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  • EUR/USD has been holding up above 1.10 amid mixed signals from Germany and China.
  • Lagarde's testimony, US data, and trade headlines are on the agenda.
  • Monday's four-hour chart is showing a downtrend.

Christmas is around the corner, but euro bulls have few reasons to relax under the Christmas tree. The new month brings old – and new troubles. On Cyber Monday, a fresh round of sales is on the cards.

The new issue is potential political instability in Germany, which may see Chancellor Angela Merkel – Europe's beacon of stability – going off to early retirement. The long-serving chancellor's junior coalition partner, the SPD, has voted to replace its leadership.

Norbert Walter-Borjans and Saskia Esken from the left-wing of the party will replace Olaf Scholz and Klara Geywitz, which are more centrists. The new pair in power want policy changes that Merkel's CDU/CSU group may refuse to accept, and that may bring down the mainstream grand coalition.

One of the changes that Walter-Borjans and Esken want is to expand fiscal spending and abandon the "Schwarze Null" policy. Such a change – which is highly unlikely – would be positive for the euro, as it would ease pressure from the European Central Bank to add stimulus of its own.

The SPD swears in its new leaders on Friday, but political developments – such as the resignation of Scholz – may come earlier.

In the meantime, the German economy continues struggling. Retail sales data for October showed a fall in volume, but consumers may have held back ahead of Black Friday. The continent's locomotive manufacturing sector is more worrying. Markit's forward-looking Purchasing Managers' Index for the sector has confirmed the improvement with a score of 44.1 points, off the lows. However, the sub-50 score reflects contraction. The common currency is struggling to rise amid such figures.

Chinese demand and US-Sino trade

The same picture of improvement but withing contraction territory applies to most other euro-zone countries. Can the sector return to growth? Demand from China is one of the critical keys. The world's second-largest economy is seeing an uptick in industrial activity as well. The official Manufacturing PMI beat expectations with 50.2 points – returning to expansion – and the independent Caixin measure exceeded projections with 51.8 points.

The data from Beijing is boosting the market mood across markets and weighing on the safe-haven US dollar, keeping EUR/USD balanced.

On the other hand, the US and China still have differences in reaching a deal. While both sides expressed optimism about cutting a "Phase One" deal, China reportedly conditions any accord on rolling back previous tariffs – not only refraining from new American ones due on December 15. President Donald Trump, who favors duties, is reluctant to undo his policies. A deal may, therefore, be premature.

The world's largest economies are also clashing over Hong Kong. China has announced it will impose sanctions on American Non-Governmental Organizations (NGOs) and has also suspended its review of a US request to allow its warships to visit the city-state. The moves come in response to the Hong-Kong bill that Trump signed into law last week. However, so far, it seems that both countries are keeping the HK out of the trade negotiations.

Two significant events on the agenda

The first trading day of the new month consists of two significant scheduled events, in addition to political developments. Christine Lagarde, the new President of the European Central Bank, will make her first appearance before the European Parliament. Lagarde is overseeing a review of the ECB's policies amid an ongoing split between those favoring a rollback of loose monetary policy and others demanding more. Her testimony on Monday may provide hints toward her first rate decision on December 12.

In the US, the ISM Manufacturing PMI is set to show improvement, but to continue showing modest contraction. Apart from providing a snapshot for the industrial sector, it serves as a hint toward Friday's all-important jobs report.

All in all, a busy day awaits EUR/USD traders, with many developments to digest.

EUR/USD Technical Analysis

EUR USD technical analysis December 2 2019

The four-hour chart is showing that euro/dollar has been setting lower highs and lower lows – a downtrend. Moreover, it is trading below the 50, 100, and 200 Simple Moving Averages – another bearish sign. Momentum and the Relative Strength Index are listless.

Support awaits at November's low of 1.0980. Next, we find 1.0950, which was a swing low in October, and then 1.0905, another trough from earlier that month. The 2019 bottom of 1.0879 is next.

Resistance is at 1.1030, the daily high. Next, 1.1070 is where the 200 SMAmeets the price, and it was also a low point in October. The late-November high of 1.11 is next, and it is followed by 1.1180.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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