EUR/USD: Bearish setup intact, Italy repeat election is a risk to the EUR


  • The short-term and long-term outlook remains bearish, as per technical studies.
  • The Eurosceptic parties could perform well in Italy repeat vote. 

The EUR/USD pair looks oversold as per the 14-day relative strength index (RSI) and a minor corrective rally looks overdue if we take into account a bullish RSI divergence seen in the 4-hour chart.

However, the broader outlook still looks bearish as indicated by the momentum studies. For instance, the 5-day moving average (MA) and the 10-day MA continues to slope downwards in favor of the bears. The 5-week MA and the 10-week MA also trend south.

Further, speculation is gathering steam that rising oil prices and the resulting pickup in inflation could force the Fed to hike rates at a faster pace. So, the USD could continue to rise.

The Euro side of the story isn't helping the matters either. The Eurosceptic parties are set to put on a good show if Italy goes to vote again, the latest Italian poll by SWG released Tuesday showed. For instance, support for Lega, who wants Italy to leave the EUR, has risen to 24.2% from the 17.4%. EUR could be in for another round of beating if the Italian-German yield spread widens.

Overall, it appears the corrective rally (if any) in the EUR will likely be short-lived.

EUR/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik believes the pair is extremely oversold.

"The 1.1840 region is quite a strong static support area, which means that a correction from current levels is not out of the table, while a break below it opens doors for a steady slump toward the next big line in the sand at 1.1660."

Support levels: 1.1840 1.1800 1.1775

Resistance levels: 1.1900 1.1940 1.1990

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