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EURUSD Looks Oversold But Further Falls Lie Ahead

EURUSD Looks Oversold But Further Falls Lie Ahead

Nick Cawley, Senior Strategist

EURUSD News and Talking Points

- Italian bond yields highlight real EUR risk.

- USD pauses before the next move higher.

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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 Indicator shows 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)

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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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