EUR/USD Forecast: Italy's issues counter trade war upside – more falls could come

Another day and another European issue limits EUR/USD's potential gains – despite trade-related USD weakness. After German weak industrial production weighed on the euro, investors are worried about the imminent collapse of the Italian government. Matteo Salvini, leader of the far-right Lega party, is keen on dissolving the coalition with the left-leaning 5-Star Movement. The odd alliance has had issues from the outset, and the leaders have clashed about a broad range of topics.

Salvini – which has gained popularity through his tough stance against migrants as interior minister – seemingly wants to take over as PM. The Italian media is suggesting October 13th as a potential election date. PM Giuseppe Conte currently refuses to step down and urges the two partners to stick together – yet to no avail. 

Italy is the euro zone's third-largest economy and has a high debt burden. The country has been at loggerheads with the European Commission over its budget and politicians in Rome may make campaign promises that Brussels will not like.

Uncertainty is weighing on the euro and also pushing Italian bond yields higher – contrary to the trend of falling yields. Investors are now paying Germany to lend money to it for 30 years. Reports suggest that it may finally be ready to use its favorable lending conditions and open up its purse strings – at least to tackle the climate emergency. The "locomotive" of the euro-zone is struggling with a drop in industrial output and exports – as shown by fresh export figures.

On the other side of the Atlantic, the US-Sino trade is showing no signs of letting up. The administration refuses to grant Huawei – a Chinese telecom giant – licenses to operate in the US. The move comes in retaliation to Beijing's decision to halt purchases of US agricultural goods – which is retaliation for American tariffs. The only silver lining today is that People's Bank of China (PBOC) has set the exchange rate of the yuan above expectations once again – showing some restraint. 

The tit-for-tat steps weigh on sentiment, push money into the safety of bonds, and raise the chances of a rate cut by the Federal Reserve – thus pressuring the US dollar. 

A grind down in the greenback may please President Donald Trump. The president tweeted that he is "not thrilled" by the strong dollar as it makes the US less competitive and repeated his calls for the Fed to act. The central bank will be watching today's release of the Producer Price Index (PPI) report for July. It serves as a warm-up for next week's main inflation data.

Overall, politics from Rome, through Washington and Beijing remain in the limelight.

EUR/USD Technical Analysis

EUR/USD has slipped below a short uptrend support line we mentioned yesterday. More importantly, the world's most popular currency pair's momentum on the four-hour chart has turned negative. On the other hand, it continues trading above the 50 and 200 Simple Moving Averages.

Support awaits at 1.1170, which provided some support earlier this week. 1.1135 is another notable cushion after it worked as such in late July. 1.1110 and 1.1101 were additional and more significant cushions in late July as well.

Some resistance awaits at 1.1220, which is where the 200 SMA meets the price. 1.1250 was the high point this week and may cap upside movement. The triple-top of 1.1285 is next.