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EURUSD: a reversal pattern is forming as Italy's debt outlook turns negative


At the end of last week, almost all major currencies showed a decline. The Briton showed the biggest decline against the US dollar (1.81%). The New Zealand dollar fell by 1.08%, the euro by 0.95%, the Australian dollar by 0.45%, the Swiss franc by 0.06%, and the Canadian dollar by 0.03%. The Japanese yen gained 0.57%.

The euro fell to 1.1336, and by the time trading closed for the day, buyers won back all their losses, updating the European high. US data and a decline in US bond yields exerted pressure on the US dollar. The fall in stock indices has resumed demand for the yen and US government bonds, and the increase in bond prices lowered their yield. Euro bulls met a resistance at 1.1421.

At the close of trading, the SP500 fell by 1.19%, the DJIA by 1.73%, and the NASDAQ by 2.06%. Sales of shares increased after the publication of quarterly reports by large corporations such as Amazon and Alphabet.

Day's news (GMT+3):

  • 12:30 UK: net lending to individuals (MoM), mortgage approvals (Sep), consumer credit (Sep).
  • 14:00 UK: CBI Distributive Trades Survey - realized (MoM) (Oct).
  • 15:30 US: core personal consumption expenditure - price index (YoY) (Sep), personal income (Sep), personal spending (Sep).

Fig 1. EURUSD hourly chart.

Current situation:

The price recovered to the estimated level through a drop to 1.1336. Uncertainty around Italy and Brexit will prevent the pair from seeing any strong growth. Therefore, the euro is unlikely to rise any higher until the situation with Italy's 2019 draft budget is resolved. The strengthening of the euro is possible against the background of the general weakening of the US currency.

At the moment I see two negative factors for the euro:

1. Standard & Poors (S&P) downgraded its outlook for Italy's sovereign debt to negative (BBB-).

2. Italy's Deputy Prime Minister Matteo Salvini said that the government will not change its course.

He also assured that no Italian bank will go bankrupt. Say what you will, but it is unlikely that investors will listen. The Italians do not want to repeat the fate of the Greeks and withdraw capital from the country, fearing that the fall in the euro will result in a banking crisis. The franc and the yen are acting as protective assets for them.

If information leaks to the media that Italian banks holding Italian bonds are having problems due to increasing yields on them, the euro will weaken on all fronts. How hard the fall will be will depend on how the media decides to report on it.

Today I wanted to consider a fall to the 67th degree, but our historic trend indicates a possible upwards reversal during the US session. In this regard, I'm anticipating a rebound from the 45th degree. 

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