- EUR/USD's uptrend at risk as coronavirus cases rise across the Eurozone.
- New lockdown restrictions may force the ECB to adopt a stronger dovish stance.
- Traders eye preliminary Eurozone PMI numbers along with virus figures.
A resurgence of coronavirus cases poses a risk to EUR/USD's uptrend, which is already showing signs of exhaustion.
"The rise in virus cases in Europe should be a cause for concern for all EUR/USD traders. The ECB is not worried about the level of the currency. But, if new restrictions lead to a further slowdown, the central bank may have to alter its stance," BK Asset Management's Kathy Lien noted in her daily analysis.
Second wave
Last week, Europe reported 300,000 new infections – the most significant weekly rise ever, including the first spike in spring, according to the World Health Organization's (WHO) regional director Hans Kluge.
France, Poland, the Netherlands, and Spain are reportedly dealing with the second wave. Britain is already considering a new lockdown, while countries from Denmark to Greece announced new restrictions on Friday.
Stricter restrictions will be imposed if the situation worsens. That will likely torpedo the nascent recovery from the coronavirus crash, forcing the European Central Bank (ECB) to add more stimulus.
So far, the ECB has been relatively less dovish than the Federal Reserve. That's one of the big reasons for EUR/USD's rally from 1.08 to 1.20, seen in the 3.5-months to Sept. 1. More importantly, the Fed recently signaled tolerance for high inflation. In other words, the central bank would allow inflation to rise above the 2% target for some time before raising interest rates. The ECB, too, may feel compelled to follow suit if the coronavirus cases continue to rise.
Apart from the number of coronavirus cases, traders need to keep an eye on the Eurozone preliminary PMI reports for September, scheduled for release on Wednesday. "A slowdown in service and manufacturing activity could be the key trigger for EUR/USD reversal," Lien noted.
Uptrend exhaustion
The back-to-back Doji candles seen on EUR/USD's weekly chart suggests the uptrend from lows below 1.08 seen in May has run out of steam.
The immediate bias is neutral, and the focus now is on the previous week's high and low of 1.19 and 1.1737.
Acceptance below 1.1737 would confirm a bearish Doji reversal or a bullish-to-bearish trend change. Alternatively, 1.19 is the level to beat for the bulls. That said, more credible evidence of bullish revival would be a daily close above the psychological hurdle of 1.20. The pair is trading near 1.1870 at press time, representing a 0.30% gain on the day.
Technical levels
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