The EUR/USD is on the defensive, having witnessed a pennant breakdown on Thursday and the fears of Italian fiscal crisis may accentuate the negative technical setup. As of writing this article, the pair is trading at 1.1557 wth 0.10% decrease in value and while the downside breakout has helped pair move out of July’s price range limitations, the pair still remains trapped in wider price range that offered great level of support and resistance in month of June. The spread or the difference between the 10-year Italian government bond yield and German bund yield jumped 14 basis points (bps) to 254 bps in the last three days, indicating a rotation of money out of high-risk bonds and into safe-haven bonds. The investors have likely turned risk-averse as Italy’s new populist government seems to have embarked on a budget policy that could set off a more vicious round of Eurozone debt crisis. The common currency could take a beating if the yield differential widens further, highlighting growing fears of the Italian debt crisis. Moreover, the yield spread daily chart shows a bull flag breakout – a bullish continuation pattern – which indicates a resumption of the rally from the April low of 114.5 bps and has opened the doors to a break above the May high of 282 bps. This provides additional support for Dollar bulls which gained positive influence from hawkish US Jobs data.
Eurozone Q2’18 GDP Data Was Key Factor in Favor of USD’s Bearish Breakout
The Euro’s decline mid-week began after the release of the Q2’18 Eurozone GDP report, which showed growth was slower than anticipated – with traders speculating that the ECB will be slow to tighten monetary policy. EUR/USD’s losses were consistent through the end of the week, but for now the price range limits of June acts as floor and roof which could greatly contain the pair’s momentum. The Euro was the second worst performing currency last week, barely edging out the British Pound. Losses were consistently modest elsewhere, with only one pair declining by more than -1% (EUR/CAD -1.27%).But the catalyst for the declines were endogenous to the Euro, with the Q2’18 Eurozone GDP report coming in weaker than anticipated (+2.1% versus +2.4% annualized), affirming the path of a slow withdrawal of monetary stimulus by the European Central Bank over the next year.
Unfortunately for the Euro, there’s not much for traders to hang their hats on in order to spark a turnaround in the EUR-spectrum. The economic calendar over the coming week features zero ‘high’ rated events, and the most important data release is either the June German Factory Orders report (Monday) or the June German Industrial Production report (Tuesday), neither of which has the cachet to move the needle in a meaningful way for the Euro. If there is one thing to watch over the coming week, inflation expectations have stabilized, and they should be supported moving forward. The price handles which offer high level of support and resistance moving forward are at 1.15254 / 1.15050 and 1.17501 / 1.17901 respectively.