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EUR/USD Price Reverses Sharp Decline as Italian Fears Cool

EUR/USD Price Reverses Sharp Decline as Italian Fears Cool

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- The US Dollar is dropping today as investors are trimming positions taken during yesterday's explosion of concerns regarding Italy.

- A cooling of tensions in Italy - that a populist government wouldn't emerge - has given traders enough of a reason to reverse the Euro's losses for the week.

- Retail traders are short the US Dollar, although positioning has trimmed overnight after the reversal.

Looking to learn more about how central banks impact FX markets? Check out the DailyFX Trading Guides.

DXY Index Rally Stalls Just Short of Key Resistance

The US Dollar (via DXY Index) rally has stopped short of the highs established in November 2017, as a cooling of fears over Italy has generated a significant rebound in EUR/USD. With the Euro constituting 57.6% of the DXY, it is no surprise then that gains have been stunted even as other major pairs (USD/JPY) rally.

The DXY Index uptrend remains healthy, insofar as the key moving average in its uptrend - the daily 13-EMA - has yet to be be breached on a closing basis since April 18. Another attempt at the high at 95.17, established with the bearish outside engulfing bar on July 20, 2017 and subsequent failed retests in October and November 2017, can't be ruled out yet.

DXY Index Price: Daily Timeframe (July 2017 to May 2018) (Chart 1)

EUR/USD Price Reverses Sharp Decline as Italian Fears Cool

Bullish momentum remains firmly in place for the DXY Index, with price above the daily 8-, 13-, and 21-EMAs. MACD and Slow Stochastics continue to trade near overbought territory, suggesting that topside momentum is firm.

A rebound in US Treasury yields might not initially translate into US Dollar gains in the near-term, as investors are simply unwinding positions taken around the spike in Italian government fears. The US Dollar gained as US yields dropped on Tuesday, suggesting the greenback has taken on the role of 'safe haven' more prominently as May comes to a close.

Euro Reverses Losses from Tuesday, Now Positive for the Week

The Euro has been hit hard by the growing contagion coming out of the Italian bond market, where the 2-year yield jumped from 0.50% at the end of last week to a five-year high of 2.84% during the day yesterday. While tensions have eased now that it appears that the populist parties won't be coming together to form a government, and instead, a late-July election looks likely, Italian yields have dropped meaningfully: the 2-year yield was at 2.04% this morning.

The dissipation of tensions in the Italian bond market, coupled with a significant beat on the preliminary May German CPI figures, has proven to be a significant enough set of catalysts to provide the Euro a lift this morning. In fact, the latter of the two catalysts may be enough to sustain a larger Euro rebound in the coming days if Italian fears continue to ease.

EUR/USD Price: Daily Timeframe July 2017 to May 2018) (Chart 2)

EUR/USD Price Reverses Sharp Decline as Italian Fears Cool

EUR/USD had fallen to its lowest level since July 20, 2017 before rebounding today, which puts its squarely in line with swing support established last July, October, and November around 1.1550. Price momentum is firmly negative (EMAs, MACD, Slow Stochastics), and price is treating the daily 13-EMA as the key resistance level in the downtrend.

Read more: US China Trade War & a Brief History of Trade Wars – 1900 until Present

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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