EUR/USD Forecast: Italian inspiration and oily inflation are worth 200 pips, but is there more?

The EUR/USD is trading above 1.1700, some 200 pips off the 10-month low of 1.1510 seen on Tuesday. A positive twist in Italy's political drama is the primary upwards driver.

After another round of elections seemed imminent, Italy may have a regular, political government after all. The two populist coalition partners are considering nominating the Euroskeptic Paolo Savona as Foreign Minister rather than at the helm of finances. Elections in which the League would gain ground and the coalition with the 5-Star Movement would grow scared markets as it may have been deemed a de-facto referendum on the Euro. 

Nevertheless, a populist government that would take the opposite side of Germany and France is not good news. Markets may realize that there is no proper exit from the Italian crisis.

Another reason for the rise of the EUR/USD has a better basis. Economic data has finally picked up. The winter "moderation" lasted for a long time. A pick up in German Retail Sales and also in inflation figures provide some relief for the European Central Bank. The ECB is still set to sunset the QE program by the end of the year. 

The Flash Consumer Price Index (CPI) for May came out at 1.9%, a significant jump from 1.2% in April and at the target of "2% or a bit below" mandated for the European Central Bank. However, energy prices and especially higher oil prices pushed headline CPI higher. While Core CPI also recovered with 1.1%, it remains far from the target. Without a quicker pace of Core CPI gains, headline inflation will not stay high for too long.

On the other side of the Atlantic, US data missed expectations: the ADP NFP came out at 178,000 against 190,000 expected and Q1 GDP was revised down to 2.2% annualized from 2.3% initially reported. 

There are additional reasons for the upswing. See 5 reasons for massive escape from the abyss

In the US, the most interesting data point is the Core PCE Price Index. This is the Fed's favorite inflation measure. It reached 1.9% in March, just below the 2% target. In addition, Personal Income, Personal Consumption, and Initial Jobless Claims are of interest.

However, markets will already be looking toward Friday's Non-Farm Payrolls. After April's report disappointed with 164,000 jobs gained and a deceleration of wage growth to 2.6%, the figures for May are expected to be slightly better.

Trade issues remain a concern. The US will later announce if it maintains the exemptions for the EU, Canada, and Mexico on steel and aluminum. The thorny issue was put on hold until the end of May in order for negotiations to continue. So far, there has been little progress and markets fear that imposing sanctions on these three key allies will serve as a significant escalation in the trade wars.

EUR/USD Technical Analysis

The RSI is above 30, which is a novelty. This implies the pair is not in oversold territory anymore. It stayed there for a long time and even fell to the deeper ground. Does its ascent to normal selling conditions mean the pair can now resume its falls? 

On the other hand, the pair broke above the steep downtrend resistance (thick black line) on the chart and this is a positive sign. The pair remains below the 50-day and 200-day Simple Moving Averages.

Looking up, 1.1726 was the high point of the week on May 28th and serves as the initial line of resistance. 1.1767 was a stepping stone on the way down and the May 9th low of 1.1822 is the next line of resistance.

On the downside, the May 25th close at 1.1648 is the first line to watch. It is followed by the November trough of 1.1550 and the fresh 2018 low of 1.1510. 

More: EUR/USD faces little resistance all the way to 1.1780 — Confluence Detector