The euro/dollar pair touched the 1.1240 mark today - the last time the price was at such lows was in the summer of the previous year, within the upward trend from the area of historical lows (when the pair was in the area of the third-fourth figure).
The combination of fundamental factors puts pressure on the EUR/USD: the dollar is growing against the background of the hawkish Fed meeting, the euro falls amid panic fears of chaotic Brexit. The Italian question and the soft comments of the ECB representatives only aggravate the gloomy picture. In other words, such a powerful price decline is quite justified – the past weekend did not bring any detente, but, on the contrary, in many respects complicated the situation in many issues.
Let's start with Italy. Last Friday it became known that the Italians will not revise the state budget for the next year and, accordingly, will not reduce the level of its deficit. In fact, Rome ignored the demands of the European Commission, after which Brussels is forced to respond to such a demarche. Tomorrow is the three-week deadline, during which the Italians had to significantly revise the main financial document of the country, while fulfilling the requirements of the EC. The decision of the Italians is already known, so tomorrow the ball will be on the side of Brussels. There is no doubt that the EU leadership will react to the current situation. Otherwise, other European countries may follow the Italian example, thus undermining the financial and political stability of the eurozone.
Therefore, with a high degree of probability we can say that on November 21, members of the European Commission will launch a disciplinary procedure against Italy. The first step in this process will be the publication of a report on the financial condition of the country – this document is necessary for the codification of violations committed by Italian authorities. After that, Brussels will have grounds for the application of financial sanctions: experts believe that the amount of the fine will be about 1.7 billion euros (i.e. 0.2% of GDP). However, this amount may double if the Italians continue to "resist". The implementation of the disciplinary procedure will last for months, so the European currency will remain under the background pressure of this factor for a long time - if, of course, Rome does not make concessions.
However, so far Italy has demonstrated not only a principled, but also a very belligerent attitude. So, the head of the Italian Foreign Ministry said today that Rome can block the adoption of the EU budget, "if European bureaucrats will continue to fool around." Similar threats had previously been expressed by the deputy prime minister. It is worth noting that such intentions are not voiced by Italian leaders in the context of a budget conflict, but because of the failure to provide assistance from Brussels on the issue of illegal migrants. But this fact all the same indicates that the parties are in a state of political clinch, the release of which is not yet in sight.
Thus, the European currency has no power to oppose the dollar, being trapped in the European conflicts - Brussels with London and Brussels with Rome. Today, the greenback is growing throughout the market by inertia, as American trading floors are closed - Veterans Day is celebrated in the United States. The producer price index published on Friday was better than expected: on a monthly basis, it updated the annual high, increasing to 0.6% (with a forecast of 0.2%), and in annual terms increased to 2.9% with a forecast of 2.5%.
This indicator is an early inflation indicator, so such figures caused a considerable resonance among dollar bulls. After the disappointing release of the consumer price index for September, inflation indicators are mainly in the "green zone", increasing the likelihood of tightening monetary policy at the December Fed meeting. Optimistic expectations overshadowed the negative impressions of the elections to the US Congress, especially against the background of Trump's readiness to cooperate with Democrats in the field of the legislative process.
So, the euro-dollar pair has updated the annual low against the background of the "black and white" fundamental background: almost all factors speak in favor of the growth of the US currency and almost all - against the recovery of the European one. In this situation, the potential for the pair's further decline is obvious, and from a technical point of view, the path is open up to the 10th figure (the lower line of the Bollinger Bands indicator on the monthly chart). But there is one "but" that should alert traders, which is the current dynamics of the pound. The GBP/USD pair is trading in the range of one hundred points - the low was marked at 1.2826, the high - at 1.2946.
The British currency reacts to the contradictory news background, which then plunges traders into a state of panic, then returns them to hope for a "soft" Brexit. If London and Brussels will still be able to find a common denominator, then there will be a "squeezed spring effect" on the market: a rising pound will help the EUR/USD pair to recover against general optimism. Therefore, when opening short positions, you should always remember that an unexpected and quite sharp jump may follow – stop loss can be placed at 1.1324, this is the opening price of today's trading day.
The material has been provided by InstaForex Company - www.instaforex.com