EUR/USD Forecast: Only Italy can help after double damage from Germany and the Fed

EUR/USD has been falling for five days – and there is no end in sight. The world's most popular currency pair has been hit by developments on both sides of the Atlantic.

Investors have been left unconvinced by Germany's baby steps to move toward stimulating the economy. The "locomotive" of the euro-zone contracted in the second quarter and is on the verge of a recession. Chancellor Angela Merkel and finance minister Olaf Scholz have been talking about tackling a potential crisis but have yet to take steps or present a plan. 

Germany has imposed strict budget rules on itself and has been one of the leading voices for austerity in the EU. Moreover, Berlin has enacted a policy of "Schwarze Null" – black zero – meaning that the budget needs to be in a minimal surplus. Changing course will be a difficult cultural change. The German word "schuld" means both debt and guilt. 

German bond yields remain negative – meaning investors pay to lend money to the government. If Berlin clings onto its policy – the European Central Bank may have to provide more monetary stimulus. If the ECB announces another round of bond-buying, the common currency could struggle.

Fed is in no rush

EUR/USD received its second punch from the other side of the Atlantic. Eric Rosengren, President of the Boston branch of the Federal Reserve, sees current interest rates as appropriate. It is essential to note that he voted against cutting rates in July – thus making his recent comments unsurprising.

Nevertheless, Rosengren's words came shortly after President Donald Trump called for the Fed to slash rates by no less than 100 basis points – four times the standard change. The central bank releases the meeting minutes from its latest decision on Wednesday, and Chair Jerome Powell is set to deliver a critical speech on Friday. 

Markets are wondering: will the Fed reduce rates again in September? The bank previously reacted to trade tensions, and these seem to be easing. On Monday, the US delayed a ban on Huawei – the Chinese telecom giant that is seen by some as a security threat. The move helped ease tensions.

Italian politics showdown

EUR/USD may find some comfort in Italian politics – and that would be a welcome change. Prime minister Giuseppe Conte, an independent, will address parliament at 13:00 GMT and may offer his resignation. He preceded over a troubled coalition government comprised of La Lega and the 5-Star Movement. La Lega leader Matteo Salvini has tabled a motion of no-confidence and seeks early elections – capitalizing on his popularity.

However, the 5-Star leader Luigi di-Maio may join forces with former PM Matteo Renzi of the Democratic Party (PD) to form a new government and avoid elections. Investors fear a government led by Salvini – that would break EU budget rules.

All the options are on the table.

Developments in Rome, Berlin, and tweets from Trump will likely dominate trading today.

EUR/USD Technical Analysis

EUR/USD continues suffering from downside momentum on the four-hour chart and trades below the 50, 100, and 200 Simple Moving Averages. Moreover, the Relative Strength Index (RSI) remains above 30 – showing that the pair is not oversold.

Some support awaits at 1.1066, which was a low point late last week. It is followed by 1.1027 – the 2019 trough. Lower, we find the round number of 1.1000 and 1.0960. 

Some resistance awaits at 1.1090, which is the daily high, followed by Monday's peak of 1.1115. The next lines to watch are 1.1130 and 1.1160 that defined the pair's range during last week.