EUR/USD: A much-needed correction to come shortly

A much-needed EUR/USD downside correction could be cooking. Apart from profit-taking, the pair has reasons to correct downward – mostly based on safe-haven flows to the dollar, according to FXStreet’s analyst Yohay Elam. 

Key quotes

“China is set to retaliate in response to the US closing of its consulate in Houston. Will investors continue ignoring this decoupling? When the US slapped tariffs on China in 2018 and 2019, stocks dropped – at least in the short-term when China responded with counter-levies. Will it happen again? The safe-haven dollar has room to rise if stocks turn south.”

“Another painful development is in the increase in US coronavirus deaths – surpassing 1,100 per day. New figures due out on Thursday – potentially sending the number of cases above four million – may continue painting a gloomy picture and could weigh on sentiment.” 

“One positive development is that Republicans and Democrats seem to be making progress – or at least not raising their rhetoric – on the next fiscal package. The GOP seems to have backed down on President Donald Trump's desire for a payroll tax cut, and the opposition seems willing to accept a decrease in federal unemployment benefits. Talks continue as the clock is ticking ahead of July 31 for extending some of the measures.”

“In the old continent, the euro continues benefiting from the EU agreement on the €750 billion recovery fund – the common currency's main driver. Italy, the hardest-hit country, is seeing demand for its debt and rise to announce new spending programs. Germany's benchmark bunds are also holding up despite upcoming competition from the mutual EU bonds.”