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The euro-dollar pair shows a weak correction growth, primarily due to a small strengthening of the single currency. Renewed optimism about the prospects for Brexit, as well as negotiations between Rome and Brussels on the resolution of the Italian budget problem provide temporary support for the euro, while the dollar index could not gain a foothold within 97 points, amid falling yields of 10-year treasuries.

This week, the focus of EUR/USD traders was Italy again. And although Rome has long demonstrated a desire to find a compromise, in practical terms, things are moving slowly. At the end of November, it became known that the Italians are ready to reduce the budget deficit, however, then the concessions were very symbolic – members of the government were ready to "yield" only 0.2% (that is, to reduce the deficit to 2.2%). Brussels immediately rejected the proposal, because the members of the European Commission initially demanded to set the bar much lower – at the level of 0.8%. Later, Brussels raised the bar, saying that the maximum allowable deficit should not exceed two percent.

The negotiation process is again bogged down in the auction, and for some time about the Italian problem in the market forgotten, especially against the backdrop of bright events related to Brexit. At the end of last week, the Italians reminded themselves – according to the local press, Rome is now ready to reduce the deficit to the range of 1.9% -2%, if Brussels does not launch a disciplinary procedure (which is fraught with a fine of 1.5 to 3 billion euros). But again - this information sounded unofficial, as the journalists referred in their publications to anonymous sources in the Cabinet of Ministers.

Exchange Rates 06.12.2018 analysis

Several representatives of the Italian government commented on the situation today. None of them voiced a compromise level of the deficit (apparently, this figure is still the subject of bargaining), but their rhetoric made it possible to understand why Rome will reduce it. So, one of officials reported that members of the government will reconsider expenses on pension reform and a number of other initiatives. According to him,the revision of costs will reduce spending by about 4, -4,5 billion euros. How much this will affect the indicator of the deficit, he did not specify – but at the same time made it clear that the parties are doing everything possible to Brussels did not apply sanctions against Italy.

Thus, a certain optimism about the resolution of the Italian budget crisis supports the European currency. Although in my opinion, this optimism is too temporary. The Italian authorities will send representatives of the European Commission a revised draft budget by next week - and only then will the official position of Brussels on this issue be known. And although the likelihood of compromise is large enough, one cannot be 100% sure of this, given the previous attempts to reach an agreement.

Indirect support for the European currency was provided by rumors that ECB members are starting to discuss measures to normalize monetary policy next year. According to journalists, most of them are hatching the idea of a smooth curtailment of incentive measures. According to preliminary data, some representatives of the central bank support primarily the increase in interest rates on deposits - if their scenario is implemented, this will be the first step in this direction.

But in this case, the EUR/USD bulls consider the ECB members' dialogue in a broader aspect. What is important here is the fact that they are discussing this issue after the release of weak data on the growth of European inflation and eurozone GDP. In addition, there was a ghostly hope that during the December meeting Draghi will announce the likely steps to tighten monetary policy. We have to admit that this fundamental factor is too weak to ensure the growth of the European currency - but in combination with other current events, it still played its part.

Exchange Rates 06.12.2018 analysis

In a technical point of view, the EUR/USD pair is at a kind of crossroads. On the daily chart, the price is located on the middle line of the Bollinger Bands indicator, which indicates the absence of a bright trend movement. But if the pair is fixed below 1.1340, then, firstly, the price will be between the middle and lower lines of the above indicator, and secondly, the Ichimoku Kinko Hyo indicator will form a bearish "Parade of lines" signal. The combination of these signals will open the way for the pair to a strong support level of 1.1250 (the lower Bollinger Bands line on the daily chart). However, if optimism prevails in the market (especially regarding Brexit and Italy), the pair may again test the 14th figure, which has recently been an impregnable stronghold for EUR/USD bulls.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Performed by Irina Manzenko,
Analytical expert
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