EUR/USD Forecast: Evergrande sends pair to oversold territory, critical support eyed

China's "Lehman moment?" – that is the question for markets on the last day of summer. Evergrande, China's the second-largest real-estate company in the world's second-largest economy, owes some $300 billion to lenders, finds it hard to pay its due. Authorities have been reluctant to bail it out. 

Uncertainty about the implications for suppliers, other construction firms and further contagion casts a dark cloud over markets all over the world. Fears are exacerbated by China's long weekend which ends on Wednesday, with a decision by the central bank. Evergrande faces a substantial debt payment on Thursday. 

China led the post-financial crisis boom, stimulating the economy and pushing up global demand – not this time. The safe-haven dollar benefits from concerns about global growth. 

The greenback is also buoyed by tensions toward Wednesday's Federal Reserve decision. While the world's most powerful central bank is unlikely to announce tapering of its bond-buying scheme, the timing of such a move remains uncertain. 

US core inflation softened to 4% YoY in August, according to data published last week, raising the chances that the Fed could wait until December. If Fed Chair Jerome Powell signals withdrawing stimulus already in November, it could further dampen the market mood. 

German finance minister Olaf Scholz remains in pole position to replace German Chancellor Angela Merkel. Markets are somewhat worried by Scholz's refusal to rule out a coalition with the radical-left Die Linke, and would prefer a a government led by center-right leader Armin Laschet.

A coalition including the business-friendly FDP – potentially after long deliberations – would calm nerves. Nevertheless, uncertainty ahead of Sunday's vote is adding pressure on the euro.

Overall, fear has taken over markets and it is weighing on the pair. While there could be some back-and-forth movement, the pressure will likely continue until Thursday – after the Fed and new developments around Evergrande. 

See Fed Preview: Three ways in which Powell could down the dollar, and none is the dot-plot

EUR/USD Technical Analysis

Euro/dollar is suffering from substantial downside momentum on the four-hour chart and failed in tis attempt to break above the 200 Simple Moving Average. However, the Relative Strength Index (RSI) is below 30, pointing to oversold conditions. That implies a temporary bounc.

Critical support awaits at 1.1705, which cushioned the pair in mid-August and then capped. At the time of writing, the currency pair's bleeding stopped at that point.

Further down, the next levels to watch are 1.1685, a temporary cap from August, and then the summer trough of 1.1660. 

Resistance awaits at 1.1735, a swing low from last month, then 1.1750 and finally the round 1.18 level.