Euro-to-Dollar Rate Falls into 1.17s on Italy Fears but Waning Momentum Raises Possibility of Bounce
- EUR/USD declines further amidst fears Italy's new coalition government could be anti-EU
- Exchange rate has declined a substantial amount from its previous 1.24 highs
- Descent to key 78.6% retracement level could offer base for a rebound
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The Euro continues its decline against the U.S. Dollar with EUR/USD now registering in the 1.17s after crystalising Italian coalition political tensions raised concerns about the future of Italy's place in the Eurozone.
From a technical perspective, the EUR/USD's new low of 1.1763 reflects a considerable pull-back from the 1.24 January highs - specifically a 78.6% correction of the previous rally.
78.9% is a key retracement level in financial markets which is supposed to offer more-than-average support to correcting prices.
A pull-back of 78.6% is sometimes associated with the potential for prices to stall and even reverse back up and rise in line with the dominant trend again.
"EUR/USD has sold off to its 78.6% retracement at 1.1767, this has held the initial test," says Karen Jones, an analyst at Commerzbank.
"We would allow for deeper rebound towards the accelerated downtrend at 1.1925 and possibly 1.2000," she adds, suggesting a a high probability of a bounce higher from the current level.
The MACD indicator is also suggesting a bounce (see above) after looking as if it ahs completed an abcd zig-zag pattern lower.
The pattern now looks complete after finishing an ending c-d wave which is of a similar length to the initial a-b wave. The pair now looks like it is readying itself for a recovery higher. A rise in MACD would support a higher exchange rate outlook too.
The relative strength indicator (RSI) - another momentum indicator - is also looking bullish for the exchange rate.
RSI has converged with the exchange rate at the current lows (see chart below) which means price has made a new low but momentum has not.
RSI is below 30 and, therefore, also oversold which is a warning sign to not open any new bearish bets.
Whislt there are multiple signals indicating the possibility of a rebound, the fact remains that the short-term downtrend remains intact and is more likely than not to extend, since the friend is "your freind" as the saying goes, so the risk of further weakness remains ever-present.
"A close below 1.1767 will target 1.1717/12, the 1.1616 May 2016 high and then the 1.1553 November low," says Jones.
"A negative bias will remain entrenched below the 1.1996 14th May high," concludes the Commerzbank analyst.
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