EURUSD drops on Italy as dollar extends recovery

The EUR/USD is breaking down as the dollar upsurge continues. This follows buck-denominated gold's meltdown from the day before. The metal remains under pressure amid an appreciating US dollar and rising bond yields. Although yields are slightly weaker today, they remain well supported in the US, especially the short-dated ones, as investors continue to expect there to be at least two more rate increases from the Fed this year. Consequently, the Dollar Index is finding itself at its best level since December. Correspondingly, the EUR/USD pair is at its weakest since the end of last year.

Italian political uncertainty weighs on euro and FTSE MIB

The euro meanwhile is coming under increased pressure because of Italy's heightened political uncertainty, and recent soft patch in Eurozone data. Reports that the Five Star Movement and the League, which are in talks to form a coalition government, are considering a debt relief from ECB to the tune of €250 billion has stoked fears over Italy’s creditworthiness. Italy's FTSE MIB has fallen sharply as a result, as too have the euro, and despite an otherwise bullish day for European stocks. Not only was the EUR/USD down but the EUR/JPY, EUR/CHF and EUR/GBP were all weaker at the time of this writing.

Soft GDP and inflation means ECB is no rush to normalise policy

Meanwhile the consistent weakness in German data in the first three months of the year meant that the economy expand by a modest 0.3% on the quarter, which was weaker than expected, as we found out yesterday. The Eurozone as a whole likewise saw its GDP grow by modestly by 0.4% in the first quarter, which was in line with the expectations. The Euro area’s CPI measure of inflation meanwhile was confirmed today by Eurostat at 1.2% for April year-over-year. With growth and inflation both weak, and Italy’s political uncertainty at the forefront, the ECB will be in no rush to normalise its monetary policy. This should keep the euro under pressure, or at best keep its gains in check, in the months ahead.

EUR/USD breaks support

The EUR/USD’s failure to reclaim the broken 1.20 handle at the start of the week meant that rates remained below the now flattening 200-day average, keeping the short-term bearish momentum intact. The world’s most heavily-traded pair has now broken its previous support around 1.1820/50, a range which is now going to be the first key resistance zone to watch. If the weakness persists, the EUR/USD could drop to test the 1.17 handle next. Around this level, we have the 38.2% long-term Fibonacci retracement coming in at 1.1710 while a prior support and resistance level is seen at 1.1680. We think that the oversold EUR/USD may stage at least a short-term bounce from this 1.1680-1.1710 area, should we get there. For this bounce to happen we ideally want to see a sudden sharp down move to this support area rather than a slow grind, for if the latter were the case then a further breakdown would become likely.

As things stand we will turn cautiously bullish on the EUR/USD on the first sign of a bear trap; for example, if rates goes back above the broken 1.1820/50 support area again. But a clear bullish development would be if a prior high was taken, in this case 1.20.

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.