EUR/USD Forecast: Italian rebellion to overshadow ECB's meeting outcome

• The EU survived Grexit and Brexit, but the whole project will collapse if Italy leaves.
• EUR/USD could extend the decline next week but don't put all your eggs in the same basket.

The EUR/USD pair gave back its previous weekly gains and retested the October low, settling below the 1.1500 level this week. The common currency is out of market's favor, unable to enter bullish territory, even in a dollar-weak environment. As it has been happening since last year, political jitters have largely overshadowed macroeconomic releases when it comes to set currencies' direction, although EU data surely didn't help. Local business confidence plunged in October according to the ZEW survey, which fell to -24.7 for Germany and to -19.4 for the whole EU. According to the release, the main reason behind such a slump is the intensifying trade dispute between the USA and China. Inflation in the EU disappointed, as the core yearly reading came in at 0.9% for September vs. an expected advance to 1.0%.

Adding to EUR woes, tensions between Brussels and Italy escalated, as the anti-establishment government's 2019 draft budget deficit, or around 2.9%, points to a “particularly serious non-compliance with the budgetary policy obligations laid down” in European rules. A delicate situation for the EU, as if Brussels tighten its position, we may be well talking about an Italexit. The EU may have survived Grexit and Brexit, but the whole project may collapse if Italy leaves. Italian government bond yields, meanwhile, keep skyrocketing to fresh multi-year highs.

The greenback, on the other hand, was lifted by a defying Federal Reserve, which seems little concerned about what US President Trump thinks. The US Central Bank has unveiled the document with the background of their latest policy meeting, indicating that they are firmly determined to keep on rising rates. Policymakers even discussed the need of pushing the benchmark rate above what they would consider a neutral level, currently at 3.0%, to keep inflation under control. As it happens with other economies, the Federal Reserve also believes that there's a downward risk coming from the US trade policy.

The upcoming week will bring some interesting macroeconomic releases, with the preliminary October Markit PMI standing out as barometers of economic health. The ECB is having a monetary policy meeting next Thursday, which will shed some light over the upcoming moves, although seems unlikely that the central bank will put something new on the table. As for the US, Durable Goods Orders and the first estimate of Q3 GDP, foreseen at 3.3% vs. the previous 4.2%, will take center stage at the end of the week.

Yields and political tensions coming from different fronts will continue to be the main motor for the pair.

EUR/US technical outlook

The EUR/USD pair re-tested October low before bouncing Friday amid a better market mood, with equities recovering and yields contained, although the pair remains below the 1.1500 figure. The weekly chart shows that the 20 SMA capped advances for a second consecutive week, while the pair is now below its 100 SMA. Technical indicators head lower within negative ground, although the downward momentum is limited, as the price was unable to break below 1.1430.

In the daily chart, technical indicators have recovered within negative levels, but are unable to enter bullish ground, while the 20 DMA extends its decline below the larger ones, also bearish, all which maintains the risk skewed to the downside. Below 1.1430, the next relevant support comes at around 1.1380, where the pair has some relevant weekly lows, en route to 1.1300, this year low. The first resistance is 1.1520, followed by a Fibonacci level at 1.1575. A firm recovery above this last could expose the 1.1660 price zone, although gains toward this last will depend on market players seeing ECB's policy meeting outcome as very hawkish.

 EUR/USD sentiment poll

The FXStreet Forecast Poll indicates that sentiment favors the greenback after the latest FOMC's Minutes, seen up against most of its major rivals. In the particular case of the EUR/USD pair, bears are the 67% weekly basis, with the average target at 1.1434, but the Overview chart showing that the largest accumulation of possible objectives comes right below the 1.1400 figure. In the monthly view, sentiment turns neutral, to flip to bullish in the three-month view. In this last time-frame, bulls are a majority of 46% with an average target of 1.1529. However, the Overview chart shows that multiple market participants are aiming for much higher levels around 1.1800.

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