EUR/USD: Downside Risks Persist

EUR/USD ped to nearly two-month lows around 1.1140 on Wednesday, as the selling pressure intensified after a break below the 1.12 support that capped the sellers since mid-June. A widespread dollar demand was one of the key drivers behind the reversal, with rising trading tensions add to the pressure.

On Tuesday, the EU trade chief said that the European Union will retaliate with extra duties on $39 billion worth of US goods if Washington imposes punitive tariffs on EU cars. The rising threat of escalation in the EU-US trade tensions is a bearish signal for the common currency as additional barrier could hurt the regional economy which is already showing more signs of slowing.

Additionally, the euro demand abated as the ECB meeting looms, with investors bet on a dovish tone from Draghi who may prepare the markets for delivering additional stimulus in September. By the way, some traders expect the central bank to cut rates during the upcoming meeting already. On the other hand, should the ECB rhetoric prove not as soft as expected, the euro may see a bounce towards 1.12 and higher. In the short-term, downside risks persist.

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