EUR/USD: Trade tensions could keep gains under check ahead of US NFP release

• Drop in Italy-German yield spread likely put a bid under the EUR on Monday. However, escalating trade tensions capped gains 1.1659.
• The common currency could revisit the previous day's high if the Italy-German yield spread drops further and EM currencies stabilize.
• August highs above 1.17 could be put to test if the US wage growth figure prints well below estimates.

The EUR/USD rose to a high of 1.1659 yesterday, possibly on the back of a drop in the 10-year Italy-German yield differential.

However, the bullish mood turned sour on reports that the Trump administration is now steering towards imposing additional tariffs on $200 billion worth of Chinese imports, having put a 25 percent levy on  $50 billion worth of Chinese goods in July. As a result, the currency pair surrendered gains and closed at 1.1622.

The common currency could pick up a bid today if the Italy-German yield spread continues to slide, implying that the market pessimism over the Italian budget is receding.

However, a break above the previous day's high of 1.1659 may remain elusive, courtesy of escalating US-China trade tensions. Moreover, China is likely to retaliate in kind if the US goes ahead with the fresh round of tariffs.

That said, a big rally towards 1.1733 (recent high) could be in the offing if the US average weekly earnings and non-farm payrollsfigure for August, scheduled for release at 12:30 GMT, misses estimates by a wide margin, adding credence to the argument put forward by the likes of Fed's Bullard that the central bank should stop raising ratesnow.

On the other hand, a big beat on the wage growth figure would reinforce hawkish Fedexpectations, driving the US dollar higher across the board. The Eurozone second-quarter GDP, due for release at 09:00 GMT, could also move the EUR pairs.

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EUR/USD Technical Levels

Resistance: 1.1659 (previous day's high), 1.17 (psychological hurdle), 1.1733 (Aug. 28 high)

Support: 1.1615 (50-day moving average), 1.1585 (Aug. 31 low), 1.1530 (Sep. 4 low)

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