EUR/USD Forecast: The Italian crisis begins biting, recovery ruined again

EUR/USD is trading in the lower half of the 1.1400 handle, down on the day. Italy is in the limelight.

Italy is dragging rate hike expectations lower

Italian bonds are sold off and the spread between them and the benchmark German bonds is widening. It will be harder for Italy to fund itself under these conditions.

Markets are reacting to the ongoing standoff between Italy and the European Commission over the Italian budget. Rome insists on a 2.4% budget deficit while Brussels demands 2%. The ball is now in the European court: the EC is expected to respond to Italy's response to the rejection of the budget. They may consider disciplinary action. 

Bond markets are also sending another message: a rate hike is no longer fully priced in for 2019. The European Central Bank signaled it will raise rates after the summer. The Italian crisis joins a general slowdown. The euro-zone grew by only 0.2% in Q3 according to the latest data while the German economy shrank by 0.2%. 

Brexit, US data

Brexit also remains in the limelight. While UK PM Theresa May is successfully fending off calls for a leadership challenge within her party, the DUP party is getting closer to abandoning the support they provide to the government. The Northern Irish unionist party objects the Brexit deal which gives a special status to the region, different from that of the rest of the UK.

Moreover, the withdrawal accord is also facing trouble on the continent. Spain says it will reject the deal if the text about Gibraltar is not changed. The Rock may prove to be a sticking block. At the moment, there is hope that the issues will be resolved by the EU Summit on Sunday.

In the US, the FOMC's John Williams remained optimistic about the economy and did not express outstanding concern. Housing Starts and Building Permits are released today. The housing sector has been the weaker link so far.

EUR/USD Technical Analysis

EUR/USD broke above downtrend resistance and hit a high of 1.1470. On the way, it flirted with overbought conditions (Relative Strength Index greater than 70) but never went too far. The RSI is now below 70 and Momentum remains positive, both bullish signs. 

On the other hand, the pair is losing the 200 Simple Moving Average it fought so hard to overcome. 

1.1420 is the low point so far today and capped EUR/USD in early November. 1.1395 served as support earlier in the week. 1.1395 held the pair down in mid-November and was a swing low earlier in the month. The former double-bottom of 1.1300 is next down the line.

Looking up, 1.1470 was the high earlier in the day. 1.1500 was the high point in November. 1.1550 and 1.1620 were high points when the trended lower in October.