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EUR/USD not expected to recover soon as indicators turn bearish

IN September 2018, Italy's new coalition government unveiled its draft budget for 2019, which would increase its fiscal deficit from the current 0.8 per cent of GDP to 2.4 per cent. This has raised market concerns towards the stability of the EU as Italy is its third largest economy, causing the EUR currency to take a hit. EUR/USD hit its high in January 2018 at the rate of 1.2557. Since then, prices have been trading in a 500 pip range between 1.1798 and 1.1329. The range coincides with the 38.2 per cent and 61.8 per cent levels of the Fibonacci retracement drawn from the 1.2557 high in January 2018 to the 1.0570 low in April 2017. In September 2018, prices failed to break above the upper price channel resistance of 1.1798 on its third attempt, reflecting the bearish underlying fundamentals of the potential Italian Debt Crisis. Since the announcement of the Italian budget, the European Council (EC) has expressed concerns over the inflated budget. The EC has requested Italy to submit a new budget that complies with EU's fiscal policies within three weeks or face disciplinary actions. In face of this potential collision between Italy and the EC, selling pressure should intensify and cause EUR/USD to drop towards the next support at 1.1329 (Low of Aug 15, 2018).

In view that the new Italian government remains defiant to EC's warning, prices are expected to eventually break below the lower price channel support of 1.1329. When this happens, prices should tank to April 2017's low of 1.0570. The exponential moving averages (EMAs) add further confirmation that the selling pressure will continue. The EMA is commonly used to gauge the general trend by filtering noise from random price fluctuations and placing greater emphasis on recent prices. Current prices well below the 200 EMA indicate that EUR/USD is still on a downtrend. Furthermore, a "death cross" has formed, a bearish phenomenon that occurs when the 50-day moving average crosses below the 200 day moving average.

With all the indicators turning bearish, the EUR/USD is not expected to recover anytime soon. The pair will continue to ease off and test the lower price channel of 1.1329. Once prices have successfully broken below the channel, prices could fall to its April 2017 low of 1.0570. This represents a 7.81 per cent downside from current prices. Hence, investors who are bearish can take these two levels as a guide to take profit.

  • The writer is investment analyst at Phillip Futures

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

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