EUR/USD Forecast: 5 reasons for massive escape from the abyss

The EUR/USD plunged to 1.1510, the lowest levels in 10 months on Tuesday. The fall was triggered by the Italian constitutional crisis that raised concern about an Italian exit of the euro-zone, Italexit or Italeave if you wish. 

Italy remains in the limelight but there are other reasons.

1) Italy may have a slightly less populist government

After elections in Italy seemed imminent, the 5-Star / League coalition suggested that their Euroskeptic candidate for Finance Minister Paolo Savona may be pushed aside so that the President will allow for the government to be formed. President Mattarella now dropped plans for a technocratic caretaker government. It seems that the Finance Minister will be more aligned with the establishment.  

2) Spain's no-confidence motion is not so easy

The euro-zone's fourth largest economy, Spain, has its own political crisis. What seemed like an imminent fall of the PP minority government is not a done deal. The opposition parties have not reached an agreement about the next steps: a new government or elections. The no-confidence vote on Friday is not guaranteed success.

3) Upbeat data

German Retail Sales leaped by 2.3%, far above expectations. Inflation in the same country also rose more than predicted: 2.2% YoY on both European and German measures. Inflation is also robust in Spain, that saw 2%, also beating early forecasts. After a long period of doom and gloom, the Spring recovery seems real. Maybe the harsh winter weather takes all the blame. 

4) Weak US data

The ADP NFP came out at 178,000 against 190,000 expected for May. In addition, the figure for April was significantly revised to the downside: 163,000 instead of 204,000 originally reported. The GDP report for Q1 also came out below expectations: 2.2% annualized growth according to the second release instead of 2.3% initially seen.

5) Profit taking

The EUR/USD was in oversold conditions for too long and the situation became extreme with the sharp sell-off on Tuesday. It made sense for the pair to recover and the fundamental reasons above certainly helped.

The pair still remains is now attempting to leave these oversold conditions with the RSI edging above 30. Nevertheless, other indicators such as the 50-day and 200-day Simple Moving Averages and also downtrend resistance all point to a broader downside trend.

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