EUR/USD Daily Price Forecast – EUR/USD Bearish Ahead of ECB Policy Update

The EUR/USD defended the key support zone yesterday, but a strong bounce may not materialize, courtesy of lingering Italy concerns. The common currency avoided a channel breakdown in Asia, possibly due to an uptick in the Chinese stocks. As of writing, the Shanghai Composite is reporting a 0.33% gain after seeing positive movement which went as high as 1.5% increase in early Asian market hours and the S&P 500 futures have recovered losses to trade flat-to-positive. As a result, the major European indices may report gains in early trade, helping stabilize the risk sentiment.

Further, the EUR may pick up a bid if the Eurozone and Germany preliminary PMI numbers beat estimates. However, gains, if any, will likely be short-lived as Rome and Brussels remain at odds over Italy’s national budget. Italy believes that the only way to cut public debt is by boosting economic growth.

Italian Budget Crisis To Limit Upside Move of EURO

Meanwhile, the Commission believes Italy’s growth assumptions are overly optimistic, making the debt reduction plan questionable. Further, the commission has said that it would start disciplinary steps, called the excessive deficit procedure, which can lead to fines of up to 0.2% of GDP if Italy continues to ignore the recommendations to cut the deficit and debt. As of writing this article, the EURUSD pair is trading near down 0.51% at 1.1414 down.

For now, Italy doesn’t seem to be in the mood to negotiate with the commission which has resulted in the spread between the 10-year Italy government bond yield and its German counterpart holding above 300 basis points. Further escalation of Italian budget crisis could result in spread widening reaching new 5 year highs going above last week’s high of 325 basis points which could deal the common currency a great bearish blow in the broad market.

The pair is expected to continue moving bearish ahead of the latest ECB monetary policy update on Thursday. On release front today, EURO will see German Manufacturing PMI for month of October, Eurozone manufacturing PMI, Markit Composite PMI & Services PMI for October, while US market will see release of new home sales data for September, Crude oil inventory data, speech from FOMC members Bostic & Mester and also Manufacturing, Markit Composite and Services PMI data.

From a technical perspective, a convincing break below monthly lows support, near the 1.1435-30 region, will reinforce the bearish bias and turn the pair vulnerable to accelerate the fall towards testing sub-1.1400 level. On the flip side, any attempted recovery might continue to confront some fresh supply near the 1.1490-1.1500 region. Expected support and resistance for the pair are at 1.1432, 1.1400, 1.1301 and 1.1517, 1.1550, 1.1590 respectively.