The foreign exchange market is experiencing times of hope and illusions, which, as a rule, do not justify themselves. This explains the spasmodic behavior of the EUR/USD pair and other currency pairs. The US-Chinese conflict has been smoldering for six months, Brexit has been negotiating for more than two years, and the issue of the Italian budget has been discussed for the second month already. Negotiation processes are accompanied by rumors and all sorts of comments that affect the mood of traders and the dynamics of trading accordingly. Therefore, any more or less large-scale price movement is primarily due to the news of the external fundamental background, while macroeconomic releases can only strengthen (or weaken) the influence of the main factor.
Today, the black band has arrived for the euro as the euro-dollar pair collapsed which is explained not only by the aggravation of the Italian crisis but also by negative macroeconomic statistics. Although yesterday morning, optimism prevailed after a published article in an Italian newspaper. According to journalists, Rome is ready to compromise if the Italian budget issue affects the markets "too negatively." As it turned out, optimism was premature. The official position of the Italians remains unchanged, in fact, like the position of Brussels.
Today, the Vice-Premier of Italy announced that his country would not continue the policy of the previous government - if Rome followed all the recommendations of the European Union, then economic growth would be minimal. At the same time, he rather condescendingly reacted to the letter of the European Commission (demanding to revise the budget deficit), making it clear that the Italians would not back down from the adopted document.
It is difficult to say whether the Italian Deputy Prime Minister voiced real intentions or is it just a political bluff designed for a potential electorate. But in any case, traders reacted negatively to such a plot twist. Just yesterday, the market was discussing scenarios for possible compromise solutions, but today, they have been showered with a "cold shower". Although Rome has three more weeks to think about this issue, it is obvious that the negotiation process will be difficult. Italian Prime Minister Giuseppe Conte has already managed to report that they have no backup plan and the deficit of 2.4% is a final and non-negotiable option.
In my opinion, these words should also be treated with skepticism, since such statements may be political in nature. But in the context of the currency and stock markets, the words of Conte have had an effect as the value of Italian bonds has once again decreased, and the yield of securities has increased again. The spread between the yields of 10-year Italian bonds and similar German bonds reached a five-year high, putting pressure on the Italian banking sector.
Although the negotiation process continues, in particular, tomorrow the French finance minister meets with his Italian counterpart, the market clearly became discouraged. The pair approached the base of the 14th figure, that is, the support level at the bottom line of the Bollinger Bands indicator on the daily chart. The southern impulse was also caused by a block of macroeconomic statistics, which was released in the red zone. We are talking about PMI indices in the manufacturing sector of key European countries such as Germany, France, and Italy. The indicators were much worse than expected.
In particular, the preliminary assessment of Germany's manufacturing PMI for October fell to 29-month lows, reaching 52.3 points. The Italian index also updated the annual minimum, while the eurozone PMI fell to 26-month lows. All this suggests that the eurozone economy can also demonstrate a slowdown, affecting the determination of the members of the ECB.
Such a fundamental background allowed the EUR/USD bears to break through the important support level of 1.1460, which in turn allowed the price to drop to the bottom of the 14th figure. If the US session will provide additional support for the dollar, for example, due to the hawkish rhetoric of Fed representatives Loretta Mester and Raphael Bostic, the bears of the pair can gain a foothold within the 13th figure. In this case, the main goal of the southern movement will be the 1.1305 mark, which is the price minimum of this year.
Experiences of traders are justified because such weak data was published on the eve of the next meeting of the ECB, which will be held tomorrow. Given the gloomy fundamental background, one can hardly expect "hawkish" notes from the members of the regulator regarding the prospects of monetary policy. Regular market hopes for a tightening of the ECB's position will, apparently, remain unrealizable illusions at least in the near future. If fears of traders are confirmed, this will allow reaching the annual minimums of EUR/USD pair for this week already.
