27.08.201912:58 Forex Analysis & Reviews: EUR/USD ugly contest continues, buy dips

EUR/USD has remained trapped in relatively narrow ranges with the pair resisting losses despite a lack of yield support with consolidation near 1.1100 on Tuesday.

The ECB will announce a package of support measures at the September policy meeting, potentially with an interest rate cut and a fresh package of government bond purchases. German benchmark bond yields remain at record lows. The euro will gain some support if the measures are seen as supportive for growth.

The Federal Reserve will also cut interest rates at the September meeting with the most likely outcome another 0.25% reduction in rates to 2.00%.

US interest rates will remain the highest for a major economy even after a further cut which will provide an element of dollar support.

Political factors will also play a key role in the short term with net volatility set to surge, especially as currency values can be driven to a very important extent by sentiment.

In this context, persistent attacks on the Federal Reserve by President Trump are likely to have an increasingly corrosive impact onteh US dollar as market sentiment deteriorates.

If the Fed eases monetary policy, it will be seen as bowing to political pressure while refusal to cut rates would increase the ferocity of Trump's attacks.

The US Administration efforts to push the dollar down are also likely to intensify and any direct intervention would trigger very sharp losses, potentially pushing EUR/USD to near 1.2000.

Strong populist gains in this weekend's German state elections could damage the euro initially, although losses for the CDU would tend to galvanise Chancellor Merkel into backing fiscal stimulus.

Brexit developments will determine the euro's trajectory. If there is any suggestion of a breakthrough in talks with the UK, the euro will find support, while any no-deal would weaken the single currency.

Technically, EUR/USD will need to hold above 1.1050 to neutralise the threat of fresh 2-year lows with strong short-term resistance near 1.1200.