21.07.202104:22 Forex Analysis & Reviews: Overview of the EUR/USD pair. July 21. Is the trade conflict between the US and China on the verge of a new escalation?

4-hour timeframe

Technical details:

Higher linear regression channel: direction - downward.

Lower linear regression channel: direction - downward.

Moving average (20; smoothed) - downward.

CCI: -101.6043

On Tuesday, July 20, the EUR/USD currency pair continued to slowly but surely slide down. The volatility of the pair remains quite weak, and the macroeconomic background is almost completely absent. Thus, the nature of the current movement remains quite logical. Recall that we expect the pair to decline to the area of the 17th level since this option is very logical from a technical point of view. In the 24-hour timeframe, the global round of corrective movement against the upward trend continues. However, at the same time, we must note that the downward movement is very weak. And this means that the US currency is becoming more expensive very reluctantly. By and large, most of the distance that the pair has gone down in recent weeks was overcome in a couple of days after the last Fed meeting.

After that and before this event, there was a very weak movement. Thus, we can assume that the US currency is not in demand right now, and traders are waiting for a convenient moment to start new powerful purchases. Recall that a couple of months ago, the pair's quotes were not far from their 3-year highs. However, they could not update them. Then we assumed that the bulls did not have enough strength for this, so they took a pause for a while, which could be nothing more than an acceleration before a new attempt to reach the 23rd level and continue the formation of an upward trend. We also want to remind you that the fundamental global factors have not changed recently, so we do not expect further strong growth of the US currency. By and large, the movement of recent weeks can be called justified only based on one factor. This factor is a little more "hawkish" rhetoric of the Fed than the ECB. And even then, the phrase voiced by Jerome Powell that the Fed may start discussing the curtailment of the quantitative stimulus program seems to have made the head of the Fed regret what he said several times already. At least, in all his subsequent speeches, Powell did not repeat this idea. On the contrary, he stated that the Fed will continue to stimulate the economy since the labor market is still very far from its pre-pandemic levels. Therefore, the reason for the strengthening of the dollar may be technical (correction), then everything is logical.

Meanwhile, in the United States, a new old topic with a trade war with China is slowly coming to the fore. Recall that just before the pandemic, the parties signed a trade deal, which left most of the mutual duties in effect. At this time, most of the goods in both directions are subject to duties. Thus, it is hardly possible to say that any of the parties benefited from this trade war or found a solution along its course. Washington wanted to get "fairer terms of trade" from China in its understanding of this phrase. However, it was not possible because China did not accept the conditions offered by the States and imposed retaliatory duties on everything that it could impose them on. Thus, the trade balance for the United States remained as deficient as it was before the trade war. Recently, US Treasury Secretary Janet Yellen said that the trade deal that was concluded in 2020 was not beneficial for America and did not solve any problems.

Moreover, all the trade duties that were introduced were shifted to the shoulders of end consumers. Thus, the trade war with China was paid for by American citizens, who are now forced to pay more for Chinese goods. In principle, this was clear from the very beginning. Most of the plans of Donald Trump looked rather dubious at first. It was strange to expect China to freely take the side of the United States in trade negotiations, which is simply unprofitable for it. And there are no winners in any war. The same applies to Trump's plan to return many American companies to America, particularly from China. According to the former US president, American companies should create jobs at home and not at the main competitor. However, he also failed to return American factories to the United States, even promising tax breaks and threatening to introduce increased taxes for "traitors." It should be understood that in the United States, in any case, labor is much more expensive, and taxes are higher. Therefore, even if American corporations received tax breaks from the American government, it still would not recoup the costs they incur on labor in China, compared to the United States. And in the end, the end-users would pay for any changes. Now, Janet Yellen hinted that new negotiations on a trade agreement are possible between China and the United States. However, it is still unclear from what position Washington will conduct them. The fact that Washington is not happy is obvious. Thus, we would say that there are much more chances for an escalation of the trade conflict between the West and China than for its peaceful settlement. Of course, so far, this is not a problem for the US currency. The dollar now has a lot of other problems, more important and global. But for the US economy, this is a new potential problem. If relations between the US and China continue to deteriorate, this may affect GDP and geopolitics. Of course, these negative consequences will not be visible. At this time, hardly anyone can say for sure what the losses of the British economy are due to the pandemic and what is due to Brexit. It can also be in the States. So far, their economy is recovering at a rapid pace, but this is artificial growth. Any country in the world can achieve the same growth by pouring trillions of freshly printed money into its economy. The real growth is most likely small. But now, there is very high inflation in the United States, which will have to be extinguished by unknown means since the labor market has not yet recovered, which means that it is still impossible to abandon QE.

The volatility of the euro/dollar currency pair as of July 21 is 52 points and is characterized as "average." Thus, we expect the pair to move today between the levels of 1.1730 and 1.1834. The upward reversal of the Heiken Ashi indicator signals a round of corrective movement.

Nearest support levels:

S1 – 1.1780

S2 – 1.1719

S3 – 1.1658

Nearest resistance levels:

R1 – 1.1841

R2 – 1.1902

R3 – 1.1963

Trading recommendations:

The EUR/USD pair resumed its downward movement. Thus, today you should stay in short positions with targets of 1.1730 and 1.1719 until the Heiken Ashi indicator turns up. Purchases of the pair will be possible not earlier than the price-fixing above the moving average line with targets of 1.1841 and 1.1902.