EUR/USD Forecast: Dead cat bounce on Italian deadline day

• EUR/USD remains on the back foot but off the lows.
• The Italian crisis comes to a head on deadline day.
• The technical picture is mostly negative but with some silver linings. 

The EUR/USD is trading in the lower half of the 1.1200 handle but off the 17-month low of 1.1215 set on Monday. The recovery from Monday's downfall is minimal and the chart shows a "dead cat bounce" pattern.

Italy remains in the spotlight. The third-largest economy in the euro-zone is set to respond to the European Commission's rejection of the Italian budget today. So far, Italy's coalition partners have been defiant on sticking to the 2.4% deficit. An Italian watchdog calculated a deficit of 2.6% if the government follows its plans. Brussels demands a limit of 2% as the country has the second-highest debt-to-GDP ratio.

If the current situation continues, the European Commission may initiate a disciplinary procedure. European Commission President Jean-Claude Juncker expressed his dissatisfaction with the current situation. 

However, there are signs of willingness to compromise from Rome. According to fresh reports, Economy Minister Giovanni Tria is set to reduce the growth estimate for 2019. The EC dismissed the projections as far too optimistic, especially after the economy stagnated in the third quarter. Italian headlines are set to dominate.

Also, Germany's ZEW Economic Sentiment is due to show ongoing pessimism in the largest economy. Germany is forecast to report shrinking economic output in the third quarter on Wednesday. Preview: Outright contraction could send the Euro even lower, regardless of expectations

US traders are returning from their partial holiday. Stock markets dropped on Monday due to concerns about tech stocks, and this supported the greenback, already buoyed by the Fed's hawkishness. FOMC members Lael Brainard and Neel Kashkari will speak later in the day.

On the other hand, market sentiment has improved as trade talks between China and the US are resuming head of the Summit between US President Donald Trump and his Chinese counterpart Xi Jinping at the end of the month.

EUR/USD Technical Analysis

Examining the four-hour chart, we see considerable downside Momentum and the pair breaking below the downtrend channel (thick black lines) that accompanies it since early October. 

However, the Relative Strength Index is just around 30, the level that implies oversold conditions. Will the pair break or bounce?

Immediate support is at 1.1215, which is the lowest level since June 2017. Further down, 1.1110 provided support back then and remains relevant. The round number of 1.1000 awaits below.

1.1260 was the high point earlier in the day and is a weak line of resistance. 1.1300 was the double-bottom that held the EUR/USD up for a long time but was decisively broken. 1.1330 served as support in late October.