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EURUSD Looks Oversold But Further Falls Lie Ahead

EURUSD Looks Oversold But Further Falls Lie Ahead

2018-05-22 09:00:00
Nick Cawley, Strategist
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EURUSD News and Talking Points

- Italian bond yields highlight real EUR risk.

- USD pauses before the next move higher.

The DailyFX Q2 Trading Forecasts for all major currencies, commodities and indices, are now availableto download to help you make more informed trading decisions.

EURUSD Pauses for Breath Ahead of Further Falls.

A combination of heightened Italian risk and a rampant USD continues to force EURUSD lower with the pair hitting the lowest level since mid-December yesterday. While the US dollar has come off its recent highs, after rallying by nearly 6% in just over a month, the trend higher remains intact. And in the case of the EUR, real political risk remains as Italy’s new populist government continues to mull a parallel currency.

In the fixed income space, the 2-year US Treasury currently offers 2.575%, just two basis points off its near 10-year high, while in Italy the 2-year yields 0.245%, sharply higher than the -0.21% seen on May 4. Italian bond yields have risen sharply over the last couple of weeks as talk about a parallel currency in Italy continues. The new populist party has mooted issuing up to EUR100 billion of ‘mini-BOTs’ to help pay state arrears. If issued this government IOU would effectively form a parallel currency - a situation that the ECB and the EU would find untenable - and the resulting risk would weigh further on the EUR.

The latest IG Client Sentiment Indicatorshows retail traders remain long of EUR/USD – a contrarian bearish sign – but traders trimmed long positions yesterday giving us a mixed signal for the pair.

A look at the daily EURUSD chart shows the December 12 swing low at 1.17175 is being respected in the latest sell-off and it may hold in the short-term. The RSI indicator also shows the pair in oversold territory although they the index has turned higher, again indicating a possible bout of short-term strength. Upside targets 1.19155 while to the downside the November 7 low at 1.15540 is a longer-term target.

EURUSD Price Chart Daily Timeframe (May 31, 2017 – May 22, 2018)

EURUSD Looks Oversold But Further Falls Lie Ahead

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What’s your opinion on the EURUSD?

Share your thoughts with us using the comments section at the end of the article or you can contact the author via email at Nicholas.cawley@ig.com or via Twitter @nickcawley1

--- Written by Nick Cawley, Analyst

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

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