EUR/USD Daily Forecast – EUR/USD To Trade Dovish Over Italian Budget Woes

The EUR/USD is trading around 1.132 handle after taking an early-Monday plunge into near-term lows as the broader market opens the new trading week with risk appetite notably skewed into the downside, and the 1.1300 major handle is going to be a key point of contention heading through the week. This week opens on a quiet note, and the economic calendar is all but empty for the Euro’s opening sessions, and US markets enjoying a Thanksgiving long weekend, but the mid-week promises plenty of action with German and EU-wide GDP figures on Wednesday, with Eurozone inflation numbers due at the end of the week as well. As of writing this article, EURUSD pair is trading at 1.1321 down by 0.13% on the day. The EUR/USD could drop below 1.13 for the first time since June 2017 as the standoff between Rome and Brussels will likely lead to a widening of the yield spread between Italian government bonds and German bonds.

Widening Italy-German Spreads Likely To Influence More Bearish Bias

According to reports from la Republica, Italy is considering to tweak the plan by lowering 2019 growth forecast to 1% to secure a budget deal with the European Union. The disputed fiscal deficit target, however, is set to remain unchanged at 2.4%. This approach is highly likely to fall on deaf ears as the EU is irate with Italian budget and is expected to reject the proposal with question of “ How Italy expects to close the current budget deficit with lower growth expectations”. Simply put, both sides remain far apart on key issues. As a result, the spread between the 10-year Italian government bond yield and its German counterpart, currently at 294 basis points (bps), will likely jump back above 300 bps, leading to a sell-off in the common currency. Such a situation could result in strengthening of bearish bias which already seems prominent among investors.

When looking from technical perspective, the daily chart shows that, after reaching the 38.2% retracement of its September/October decline mid-week, the pair retraced quickly, increasing chances of a bearish breakout in the upcoming days. In the same chart, the 20 SMA acted as dynamic resistance throughout the week, now accelerating south below the larger ones and converging with the 23.6% retracement of the mentioned decline around 1.1420. The Momentum indicator stabilized within negative territory, while the RSI heads south, currently at 37, keeping the risk skewed to the downside. In the 4 hours chart, and for the shorter term, the bearish potential is also strong, as the 20 SMA changed course and now heads slower alongside with the 100 SMA in the 1.1400 area, while technical indicators lost downward strength near oversold readings at the end of the day as a result of decreasing volume, far from indicating downside exhaustion. Expected support and resistance for the pair are at  1.1300, 1.1265, 1.1230 and 1.1370, 1.1420, 1.1460 respectively.