As market jitters over Italy’s political turmoil partially subsided on Wednesday, both the euro and key global equity markets gained some respite from the previous day’s heavy pressures. EUR/USD bounced sharply off Tuesday’s new 10-month low of 1.1513 after reports surfaced that the two political parties currently at the center of Italian political focus would make another attempt at forming a coalition government. Coalition talks had failed over the past weekend, raising the specter of new elections and a potential extension of political uncertainty both in Italy and in the euro area as a whole. Any success in forming a coalition between the two anti-establishment parties would avoid both the need for a new election and the uncertainty that would accompany it.
While revived attempts at coalition talks indeed provided respite for the euro on Wednesday, the shared currency’s short-term fate will be determined largely by the success of those talks. Meanwhile, the other side of the EUR/USD currency pair, the US dollar, will be strongly impacted this week by key data releases out of the US. On Wednesday, two major data releases came out worse than expected. ADP private payrolls for May increased by 178,000 jobs, less than the 190,000 expected. US preliminary GDP for the first quarter came in at 2.2% (annualized) against prior expectations of 2.3%. Looking forward, Friday brings the highly anticipated US jobs report for May. Headline non-farm payrolls are expected at around 190,000 jobs added, after the previous month’s moderately disappointing 164,000. In terms of wage growth, average hourly earnings are expected at +0.3% after the previous month’s disappointing +0.1%. The unemployment rate is expected to come in unchanged at a low 3.9%. US ISM manufacturing PMI (58.2 expected) is also scheduled for release on Friday, after the jobs report.
Amid the continued specter of Italian debt and political turmoil as well as the noted data releases out of the US, EUR/USD remains entrenched in a sharp downtrend for the time being. The latest tumble saw the currency pair breakdown below the key 1.1600 area on Tuesday before rebounding back above that level on Wednesday. With any return of market concerns over Italy-driven destabilization of the eurozone and/or strong US data this week that potentially results in a rebound for the US dollar, EUR/USD could be poised to extend its entrenched downtrend that has been in place since mid-April. Any such continuation of the EUR/USD slide below 1.1600 could then target the next major support area to the downside around the 1.1300 handle.