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EURUSD Rise From Dovish Fed Limited by Italian Fears, Eyes on ECB Minutes

EURUSD Rise From Dovish Fed Limited by Italian Fears, Eyes on ECB Minutes

2018-11-19 10:35:00
Justin McQueen, Analyst
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EUR Analysis and Talking Points

  • Cautious Fed Support the Euro
  • Italian Showdown to Limit Upside
  • ECB Minutes May Highlight Concerns

Cautious Fed Support the Euro

The recent USD selling amid cautious Fed rhetoric from both Powell and Clarida has provided upside risks for the Euro. On Friday, Powell had highlighted that the US could face headwinds going into next year over slowing demand, alongside fading fiscal stimulus. This dovish commentary had been echoed by Clarida who stated that the slowing of the global economy is becoming a headwind. This in turn has seen Fed Fund futures flatten with markets pricing in 57bps worth of tightening by December 2019, this is in stark contrast to the Fed’s current dot plot projection, which implies 100bps worth of tightening (1 more 2018 hike and three 2019 hikes). Given the cautious Fed commentary, eyes will be on Fed’s Williams who is scheduled to speak at 15:45GMT.

Italian Showdown to Limit Upside

The showdown between Italy and the European Commission may see Euro gains limited as the EC look to discipline Italy over its 2019 budget. On Wednesday, the EC will complete its assessment of Italy’s revised budget and publish an opinion. However, given that the key details (namely the budget deficit target) remain unchanged, it is likely that the opinion will be unfavourable, meaning that they EC will look to begin the excessive debt procedure which may lead to fines for Italy. As such, rising tensions continue to provide downside risks for EURUSD.

ECB Minutes May Highlight Concerns

On Thursday, markets will digest the latest ECB monetary policy meeting minutes. While the ECB look set to end QE purchases by the year-end, focus is beginning to centre on rate hike expectations, which have reduced in light of the increased uncertainty regarding Brexit and Italy. Alongside this, focus in the minutes will be on the number of council members who suggest that risks to the Eurozone are titled to the downside. As a reminder, at the most recent monetary policy meeting, the central bank left its forward guidance unchanged (risks broadly balanced), however, with an evident slowdown in Germany (GDP contracting for the first time in 3 years) amid the knock on effects from trade wars, several members may begin to fret over current environment.

EURUSD Rise From Dovish Fed Limited by Italian Fears, Eyes on ECB Minutes

Source: Refinitiv. ECB rate hike projections, showing odds of a 10bps hike to deposit rate via overnight index swaps.

EURUSD Price Chart: Daily Time Frame (October 2017-November 2018)

EURUSD Rise From Dovish Fed Limited by Italian Fears, Eyes on ECB Minutes

Chart by IG

Topside resistance at 1.1430 is curbing further gains for now. A break above could see 1.15 tested. However, there is still some way to go to change the bearish sentiment in the pair, whereby a breach of the descending trendline is needed. Support is sitting at 1.13 yet again.

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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