EUR/USD: Battles towards 50% Fibo despite blatant risks, but sentiment could be turning again for the dollar

EUR/USD, for the most part, has traded around dollar and sterling flows on Wednesday. The single unit managed to hold in the positive territory within its comeback from the 1.1215 lows, rising to a recent high of 1.1341 as the dollar falls over from the 97.40s double top area down to 96.77.

The single unit has held on despite the bad news from both Germany and Italy. Firstly, the German economy, the euro zone's core, had contracted in the third quarter for the first time since 2015. However, some of the weakness may just be temporary where a disruption to car manufacturing (related to new emissions tests) has weighed. Overall, the second read on Eurozone Q3 GDP was confirmed at 0.2% q/q, in line with the market's expectation at 0.2%; (last: 0.2%). Italy's print, on the other hand, came in at 0.0%; And that's not all, (nor was it a surprise).

Italy’s populist government defiantly refused to bow to EU demands to change its big-spending budget for next year and are sticking to their deficit target which was hitting bonds and BTP futures with interior minister Matteo Salvini declaring on Wednesday: “We won’t budge a millimetre.”

Politics, politics and, well, more politics

• EU's Barnier: Brexit deal brings legal certainty on consequences of Brexit

Sticking with politics, it was all about Brexit in the main and at the time of writing, EU's Barnier is speaking at a press conference following the Brexit deal crossing the finish line with the UK Cabinet's approval of  PM May's draft deal, saying that the backstop is not meant to be used. The EU has said that the UK and EU will access each other's markets on the basis of equivalence.

US dollar losing its footing again

• US: Inflation allows the Fed to continue raising rates gradually - RBC

The US dollar, in all of this, lest we forget, has been on a downward spiral and is testing a key support area at this juncture at around 96.70/80. Indeed, the dollar is weaker again and perhaps undervalued when considering the number of geopolitical and general risks out there that are keeping the markets cautious, including the rout in oil, China’s slowing growth, tightening liquidity and a hawkish Fed. One of the main catalysts to investor's flight to safety, when looking at the decline in US yields (move inversely to bid in bonds), would be the 25% decline in oil.

Meanwhile, the US CPI print showed the largest increase in nine months, and oil would have played its part in that also. However, now with oil falling away so heavily on poor demand outlooks, perhaps the market can reassess the Fed's rate policy? As crowded as the dollar has been, it is vulnerable to the downside on a less hawkish outlook for the Fed. 

• US yields: 10Y to hit 3.5% in three to six months - Danske Bank

Fed's Chairman Powell to spark more volatility? 

Looking ahead for today, we will hear from Fed's Chairman Powell in early Asia who will be discussing the US economy from around 10 am Sydney time/ 6 p.m. Eastern. Considering the performance of the DJIA of late, we might hear from him what the implications of Fed hikes will have markets and on the global economy - (Making for the perfect addition to what has already been a volatile day in the FX-Space and general financial markets - The VIX is at 20.27 +0.25 (+1.25%) on the day).

EUR/USD levels

• Support levels: 1.1240 1.1215 1.1180.
• Resistance levels: 1.1325 1.1355 1.1390.

Valeria Bednarik, Chief Analyst at FXStreet, explained that the pair eased from the mentioned high following a collapse in Pound, finishing the day around 1.1300:

"The 4 hours chart indicates that the pair lost part of its upward strength, barely holding above a bearish 20 SMA which converges with the 23.6% retracement of the latest daily decline, as technical indicators lost upward strength, the Momentum above its mid-line and the RSI at around 50. The pair failed to retain gains above the 38.2% retracement of the mentioned decline after nearing the 50% retracement of the same slump at 1.1355, with gains beyond this last needed for a firmer advance."