Could EUR/USD rise from the ashes?
Fawad Razaqzada May 29, 2018 8:20 AM
Sentiment has been dominated in recent times by political turmoil in Italy, which took another twist at the weekend following the breakdown in the coalition between the Five Star Movement and the League.
Sentiment has been dominated in recent times by political turmoil in Italy, which took another twist at the weekend following the breakdown in the coalition between the Five Star Movement and the League. It came after Italy’s President, Sergio Mattarella, on Sunday vetoed a euro-sceptic choice for economy minister, opting instead to ask ex-IMF economist, Carlo Cottarelli, to form a temporary government. As a result, the prospects of a quick return to the polls just 12 weeks after latest elections, look increasingly likely.
Investors don’t like increased uncertainty, not when there is increased risk of a country leaving the euro. So, Italian bonds, stocks and the euro have all sold off further at the start of the week. The cost to protect against a default on Italian debt has risen sharply, as has the spread between the German and Italian yields.
Mr Cottarelli has indicated he will hold new elections by early next year, but the prospect of an earlier vote is likely should he fail to pass a programme to parliament. In this event, the government would resign immediately and new elections will be held in early September. This would work in the two populist parties’ advantage who will likely rally support behind their claim that the Italian and the European establishments are preventing the will of the people.
Is the Italian sell-off overdone?
But with a temporary government looks set to take charge of Italy, we think this will alleviate some pressure on Italian and European assets in the short-term. So, we reckon a recovery for the European indices, bonds and possibly the euro could be on the cards this week.
As far as the EUR/USD is concerned, it faces additional risk of further dollar appreciation with the buck going up against all major currencies of late except the safe haven yen and gold. The dollar will be in greater focus towards the end of the week when the latest US jobs report is published on Friday.
EUR/USD could trap latecomers
However, with both the Italian sell-off and dollar buying may well be overdone in the short-term. Indeed, the momentum indicator RSI is at severe oversold levels of below 20 as the EUR/USD probes liquidity below the prior swing low of 1.1555. With the market being so stretched, we are on the lookout for the latecomers to get stitched up. In other words, we are now on the lookout for a false break reversal to potentially form here. If the EUR/USD closes the day well above 1.1555 then we will have a hammer-like or even a bullish engulfing candlestick pattern on the daily time frame. This could very well be the reversal pattern that we are looking for. However, if rates close well below 1.1555 then in this scenario, we will look for further weakness towards 1.1500, if not lower.
Source: eSignal and FOREX.com.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.