EUR/USD Forecast: gains are limited as Italian political uncertainty is not much better than a populist government

• The EUR/USD started the week with a significant Sunday gap on political developments.
• Thin liquidity on the US, UK bank holidays implies choppier trading conditions.
• The technical picture remains bearish for the pair which is capped under downtrend resistance.

The EUR/USD is trading below the 1.1700 level after closing at 1.1648 on Friday. The pair opened with a Sunday gap on the news from Italy where a populist government failed to rise over the weekend. 

President Sergio Mattarella used his powers to reject the coalition's candidate Paolo Savona for Finance Minister. The 81-year old is a known Euroskeptic and was chosen by the 5-Star Movement and the League, as well as Prime Minister-designate Giuseppe Conte. Mattarella said he cannot accept a minister that would risk Italian savers, as bond yields have risen. In response, Conte returned the mandate and 5-Star leader Luigi di Maio called for the impeachment of the President. The euro zone's third-largest economy may hold new elections on September 9th, but nothing is certain. 

Markets preferred the uncertainty and a potential caretaker government over the populist coalition which planned to slash taxes and increase spending, thus enlarging Italy's already high 132% debt-to-GDP ratio. Savona's candidacy had caused concerns last week. However, the Italian issue is far from being resolved. 

Another positive political development came from the Korean peninsula. After US President Trump canceled the Summit with North Korean Leader Kim Jong-un, South Korean President Moon Jae-in met with his North Korean counterpart over the weekend in a surprise move. In addition, a US delegation was dispatched to Pyongyang and the Summit may still take place in Singapore on June 12th. The resulting risk-on sentiment also helps the pair.

These developments are good for a bounce from the lows but not for a full-scale turnaround. The euro-zone still underperforms the US and the European Central Bank lags behind the Federal Reserve. After reaching 1.1726, the pair is sliding, albeit not closing the gap at the time of writing. 

EUR/USD Technical Analysis

The thick black line on the chart shows a steep downtrend resistance line which caps the pair. The RSI is around 30, flirting with the oversold territory. In addition, Momentum remains to the downside. 

The 2018 low of 1.1646 is close and is the first line of support. 1.1600 is a round number and may delay a fall. Substantial support is only at 1.1550, the November low.

On the upside, 1.1717 was a low point in December 2017 and still serves as a pivotal line. 1.1767 was a stepping stone on the way down and may provide some support. 1.1822 was the May 9th low and switches to resistance. 

More: EUR/USD faces strong resistance after Italian-induced recovery — Confluence Detector