EUR/USD: On the defensive below 76.4% Fib ahead of the ECB

EUR/USD closed below 1.1422 (76.4% Fib of Aug low/Sept high), bolstering the already bearish setup.
Italy concerns linger, Italy-Germany 10-year yield spread near 5-yer highs.
ECB to downplay risks and reiterate commitment to end asset purchases in December.
The EUR may pick up a bid if the market narrative on risk aversion and Fed tightening changes.

Omkar Godbole FXStreet Contributor

The EUR/USD is on the defensive ahead of the ECB rate decision.

The currency pair closed below 1.1422 yesterday, establishing a lower lows and lower highs pattern on the daily chart. The bearish daily close also adds credence to the descending 5-day and 10-day EMAs.

What's more, the spread between the 10-year Italian government bonds and German bunds is closing on fresh five year highs above 325 basis points, implying lingering concerns in the market about Italy's budget.

Moreover, the euro's current woes are largely those of the EU, according to FXStreet's Joseph Trevisani. This is evident from the fact that the common currency has dropped more than 400 pips in the last one month and during the same time frame, the 10-year Italy-Germany yield spread widened by 100 basis points.

So, it seems safe to say that for the EUR, the path of least resistance is on the downside.

Still, the drop toward August lows may not materialize if the ECB downplays risk aversion and Italy concerns and reiterates commitment to end the QE program in December.

More importantly, the narrative on the equity market instability and its impact on the Fed tightening is changing. The Asian desks offered USD, possibly due to fears that sustained risk aversion may force the Fed to soften its hawkish stance.

If this narrative gains acceptance among the European and US traders, then the EUR/USD may rise well above 1.1422, neutralizing the immediate bearish outlook.

On the other hand, a drop to 1.13 could happen in the next day or two if the ECB changes course, courtesy of multiplying signals of turbulence.

At press time, the EUR/USD is trading at 1.1408, having clocked a low of 1.1379 yesterday.

EUR/USD Technical Levels

Resistance: 1.1422 (former support-turned-resistance), 1.1449 (5-day MA), 1.1492 (10-day MA)

Support: 1.1379 (previous day's low), S2: 1.1366 (August 2016 high), 1.13 (August low)

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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