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EUR/USD Price Forecast – EUR/USD Drops below 1.14 Handle over Escalating Political Tensions in Europe

Colin First

The EUR/USD pair has been on steady decline post release of FOMC update as the pair faces bearish pressure from both sides. While Fed provided hawkish forward guidance despite no change in rates as per market expectations, escalating political tensions in Europe is also greatly weighing down on Common currency. Political strife in multiple fronts such as Brexit proceedings and the standoff between Brussels and Rome are only set to escalate in the coming weeks. While Brexit deal has been a slow progress, escalating tensions between EU & Italy is steadily driving the spread between the Italian-German 10-year yield spread towards the 300 bps-mark and adding to that, the two main coalition partners in Italy continue to quarrel about measures that should restrict immigration which is also greatly weighing down EURO in broad market.

FOMC Update Met Investor Expectations Which is Highly Positive for USD

Such issues are capping the euro’s advance while the recent grounding in US politics removes a layer of uncertainty surrounding the US political landscape giving investors a green light to stay in US denominated assets and the greenback. The EUR/USD pair rose modestly after the release of the FOMC statement and climbed to 1.1409. But it quickly weakened, breaking below previous lows and in Asian market hours today the pair fell well below 1.1350 mark as the US central bank left the Fed Funds rate at  2.00- 2.25% and the statement also contained practically no changes from the September meeting which gave US Greenback a solid bullish support. As of writing this article, the EURUSD pair is trading at 1.1346 down by 0.16% on the day. Italian bond yields increased overnight after the Finance Minister said the EU commission’s forecasts for Italy were “inadequate and partial analysis”.

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He added that the EU ignored “clarifications provided by Italy”. This comes as the EU warns that Italy’s budget deficit will move dangerously close to the bloc’s limit of 3%. On the other hand, the direction in which central banks from either side of Atlantic are moving is showing high probability for monetary policy between the two to continue widening in future. As a result, the spread between the US 2-year treasury yield and its German counterpart could continue to climb new heights in the USD-positive manner, having hit a fresh multi-decade high of 358 basis points (bps) yesterday. The technical charts are also echoing similar sentiments. For instance, the pair closed yesterday 1.1363, confirming a bearish doji reversal, meaning the recovery rally has likely ended and the bears have regained control. The bear may further strengthen if the spot drops below the key support at 1.13 (August low and October low).

This article was originally posted on FX Empire

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