- The EUR/USD is trading at the lowest levels since July 2017 and is more than 1,000 off the highs. The next levels are from 2017.
- The spiraling rout in Italian bonds is the latest trigger to hit the pair.
- Influential billionaire Gergo Soros warns of a potential major crisis.
The EUR/USD has hit a low of 1.1530 at the time of writing, the lowest since July 18th, 2017. The latest move below 1.1555 also completes a 1,000 pip fall since the pair hit a high of 1.2555 on February 16th. Most of the fall came in the last six weeks.
The political crisis in Italy is the primary driver. Markets initially cheered as Italian President Mattarella blocked a populist government by rejecting Paolo Savona as Finance Minister. The mood quickly changed as both parties, the 5-Star Movement and the League expressed their frustration at the decision by the establishment and called for protests. They blame foreign intervention for the move. Their complaints come on the fertile ground especially as the new Prime-Minster designate Carlo Cottarelli is an ex-IMF director. Cottarelli is due to present his government in the afternoon and will probably keep the Finance Ministry to himself.
The sell-off in Italian bond yields of all maturities spiraled out of control and added a lot of fuel to the fire. Stocks are sold off across the world and US Treasury bonds whose yields recently reached new levels at 3.13% are suddenly in demand. The yield is back down to 2.84%.
The flight to safety may also be exacerbated by comments made by billionaire George Soros. The influential businessman, famous for “breaking the Bank of England†in the early 90s, said we may be heading for a major financial crisis. He said that everything that could have gone wrong went wrong, listing Italy, trade wars, the tensions between the US and Europe, the abandoning of the Iran deal, and more.
In addition, Spain, the next big economy after Italy, is facing its own political crisis. A widespread corruption scandal that engulfs the ruling PP party threatens to due to present his government in the afternoon. The debate over a no-confidence motion will begin on Thursday. Spanish bonds and stocks are suffering as well.
He added that the European Union is facing an existential crisis and that the flight to the US Dollar hurts emerging markets. Is he predicting further EUR/USD falls?
EUR/USD Technical Analysis
The RSI on the daily chart is well below 30, indicating oversold conditions. As the chart shows, this is not a rare condition for the pair in recent days. Momentum remains firm to the downside and the pair is below the downtrend resistance (thick black line) and both the 50-day and 200-day Simple Moving Average.
Moreover, the 50-day SMA is falling sharply towards the 200-day one. A break would be the “death cross†pattern.
After breaking below 1.1550 seen in November, the next support line is at 1.1480, below the round number of 1.15. This was a support line in July 2017. Further down, 1.1375 was a stubborn line of support earlier in July. The round number of 1.1300 was a swing low at the beginning of that month.
Should the pair totally collapse, strong support awaits at 1.1115 which was a critical level back in June 2017. Below that point, it is only the round number of 1.10.
On the upside, previous support lines turn into resistance. The round number of 1.1600, lost earlier in the day is the first line to watch. Above, we find the 1.1648 level which was the closing figure on Friday. Higher, 1.1726 capped the pair’s recovery attempt on Monday.
More: EUR/USD dead cat bounce déjà vu— Confluence Detector
