EUR/USD Forecast: Up on Germany but Italy could bring it down again

The EUR/USD is moving up, trading around 1.1570 at the time of writing. German retail sales jumped by 2.3% in April, fat above 0.5% expected. The data provide fuel for the recovery. For quite a long time, euro-zone economic indicators disappointed. The jump in activity in the continent's largest economy in April is a much needed shot in the arm.

The European Central Bank and others theorized that a harsh winter and other temporary factors caused weak growth in Q1 and that a recovery will be seen in Q2. Finally, this theory begins making sense. 

To confirm the weakness in the first quarter, French GDP was downgraded to 0.2% QoQ, down from 0.3% initially reported.

Italian crisis

The broader picture is not that great. The dominant theme in global markets remains the Italian constitutional crisis. Italy is set to go to the polls on July 29th, less than five months after the elections in March. The populist 5-Star Movement and the League gained further popularity and are set to win the polls after the recent debacle. President Sergio Mattarella rejected the coalition's candidate for Finance Minister, the 81-year old Paolo Savona which is an outspoken Euroskeptic. The parties raged that an unelected official defies the will of the people and perhaps serves foreign powers. 

Many see the upcoming elections as a potential referendum on the euro, and this is one of the reasons that the odds of an "Italexit" or "Italeave" have risen from 3% to 11%. 5-Star Leader Luigi di Maio said he never sought a euro-exit and this somewhat calmed markets and allowed the EUR/USD to bounce off the new 10-month lows at 1.1510.

Nevertheless, global stocks remained depressed, and the crisis is far from over. There are many ways this ongoing story could unfold. 

See: Italexit: 9 questions and answers to the Italian crisis and potential euro-exit

Also, markets may become concerned about the new tariffs that the Trump Administration wants to impose on China, focusing on tech and investments. With the danger of Italy leaving and destroying the euro-zone, this theme was pushed aside. It may come to haunt markets.

Busy day of data

Apart from Germany's retail sales, the country also publishes its preliminary CPI for May, and it is expected to rise by 0.3% MoM, after 0% in April. The data feeds into the all-European measure released tomorrow. Spain's inflation jumped to 2% YoY, above 1.7% expected. 

In the US, the ADP private sector jobs report is projected to show a gain of 191,000 positions in May, slightly lower than 204,000 seen in April. See the preview: Private hiring in May set to double the historical average    

15 minutes later, the US publishes its second estimate of Q1 GDP which carries expectations for a small upgrade from 2.3% to 2.4% annualized growth. The internal composition may change. See: US GDP revision Preview: First quarter growth seen slightly higher than originally estimated

While the data points are top-tier ones, the Italian crisis and also trade issues will remain in the limelight.

EUR/USD Technical Analysis

The EUR/USD remains in oversold territory, with the RSI below 50 points. Nevertheless, this situation has not stopped the pair's fall in the past. Momentum remains firmly to the downside and picture on the daily chart is of a free-fall. 

The 1.1550 level was support in November and remains relevant. 1.1510 is the current 2018 trough and the lowest in 10 months. 1.1480 is next down the line. 

On the upside, 1.1648 was the closing level on May 25th. It is followed by 1.1725 which capped the pair on May 28th and further up, the May 9th low of 1.1822 awaits.

More: EUR/USD Forecast: 1,000 pips down at 10-month lows, George Soros says full financial crisis could come, levels to watch