EUR/USD Forecast: Between optimism on the trade truce and the populists' puppet

• The EUR/USD is looking for a new direction after recovering from the fresh 2018 lows seen on Monday.
• The formation of a new government in Italy and the strength of the US Dollar are high on the agenda.
• The technical picture remains bearish, but Momentum is waning.

The EUR/USD trades around 1.1800 on Tuesday, which is the first working day in many European countries that celebrated Whit Monday. Italy, the third-largest economy in the euro-zone, remains in the limelight. Italian President Sergio Mattarella is expected to give the go-ahead to Giuseppe Conte, a political novice and a compromise candidate between the 5-Star Movement and the League that are set to form the new government.

Both parties want sweeping changes to the economy which include both lower taxes and higher outlays. The plans, which are set to raise Italy's already high 132% debt-to-GDP ratio, are worrying markets. Italian bond yields have jumped, and the Euro has suffered in recent days due to these worries. Valdis Dombrovskis, the European Commission Vice-President for the Euro and Social Dialogue, has demanded a responsible fiscal policy. An earlier version of the government program included the idea of writing down €250 billion in debt and mused about a parallel currency. 

Comments from Conte of his political masters from both parties could shake the euro. A soothing message of calm could send the common currency higher while signs that he will be a "puppet of the populists" will weigh on the Euro. 

The US Dollar remains robust even as US bond-yields have stabilized. The US and China have announced a truce in the trade wars and are looking to defuse tensions. A report that China will cut import duty on cars from 15% to 25% triggered a risk-on move that is helping the EUR/USD. The negotiations between the No. 1 and No. 2 economies continues and may still have quite a few ups and downs. 

The economic calendar remains light, leaving political developments and yields to determine the next directions. 

EUR/USD Technical Analysis

The EUR/USD has lost some of its downside momentum but still leans lower. The RSI on the daily charts is flirting with the 30-level. A drop below that level represents oversold territory. The pair remains below the 50 and 200-day Simple Moving Average. All in all, the trend continues to the downside.

1.1717 was the low point seen on May 21st and is also a support line in mid-December 2017. Further down, 1.1695 was a low point in November. Even lower, 1.1550 was a swing low in November. 

On the topside, 1.1822 was the May 9th trough. It is followed by 1.1850 which capped the pair later on when it attempted a recovery. 1.1915 was the January low. 

More: EUR/USD cliff is close, could be a free-fall if it breaks — Confluence Detector