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EUR/USD off highs as EC reportedly rejects Italy's revised budget

With stocks, crude oil and cryptocurrencies making big moves this week, the traditional FX markets have been a little quieter in what has been a light week for economic data. Still, currencies which are more sensitive to changes in risk appetite – those that have the greatest correlation with the stock markets – like the Japanese yen and commodity dollars, have experienced more volatility. That being said, yesterday was also a relatively volatile day for the EUR/USD, which gave up its earlier gains to drop more than 100 pips from its highs. The drop came on the back of a 5-day countertrend rally as sentiment had turned slightly negative towards the US dollar in light of last week’s cautious assessment of the US economy by two Federal Reserve members, which raised speculation about the pace of future tightening and the probability for a December rate hike fell noticeably.

Confusion over Italy’s budget

Despite yesterday’s sizeable drop, the euro started today’s session positively after Italy’s Salvini was reported as saying that the nation’s controversial 2.4% deficit target can be discussed. However, Reuters then corrected its headline which now stated that the 2.4% deficit target CANNOT be discussed. Then, according to another headline from ANSA, the European Commission has apparently rejected Italy's revised budget. So just like that, any hopes that the stand-off between Italy and the EU would be resolved have been dashed. Amid the confusion, the EUR/USD spiked both sides of the 1.14 handle but was trading below it – around 1.1385 – at the time of writing.

Dilemma for EUR/USD traders

So, participants in the EUR/USD are faced with a dilemma. On the one hand, the prospects of slower rate hikes from the Federal Reserve could weigh on the dollar. On the other hand, there is still no solid reason to be heavily bullish on the euro, given the situation in Italy and soft economic growth in the Eurozone. Consequently, we may see further range-bound price action until there is a clear fundamental catalyst to drive the exchange rate in one or the other direction in a meaningful way.

Technical outlook: engulfing candle points to potential resumption of downtrend

From a technical point of view the EUR/USD formed a bearish engulfing candle on its daily chart yesterday after a sizeable 5-day countertrend upward move. If one can trust this to be a valid bearish signal, then we may have seen the resumption of the longer term downward trend on the EUR/USD. So, the key level to watch now is yesterday’s low at 1.1360 and should we go AND hold below this level then the bears may once again aim for that long-term 1.30 support as their next target, while the liquidity below this month’s earlier low at 1.1215 would be the subsequent objective in the event the selling pressure continues.

However, if there’s no significant follow through after yesterday’s apparent reversal and price subsequently breaks above the bearish engulfing candle then this would indicate that the sellers may have gotten into trouble. Specifically, the most recent high at 1.1500 is where the line in the sand is now and so should the EUR/USD go above here then it may continue squeezing the shorts and climb towards the next key resistances around 1.1550 and 1.1600 next.


Source: TradingView and FOREX.com

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