EUR/USD Forecast October 1-5 – Italy’s budget breach bites and it’s not over

EUR/USD reached new highs only to fall sharply as Italy’s budget came to the forefront. The issues are far from being resolved. PMI data stands out in the first week of Q4. Here is an outlook for the highlights of this week and an updated technical analysis for EUR/USD.

The Italian government decided on a budget deficit of 2.4% of GDP, higher than what the technocratic finance minister Giovanni Tria wanted, 1.6% and more than the EU wanted. The plunge in Italian stocks and bonds weighed heavily on the euro but the populists’ parties that govern the euro zone’s third-largest economy are not impressed. Core inflation disappointed with 0.9%. On the other hand, ECB President Mario Draghi was bullish on the prospects of core inflation rising up and on the acceleration in wages. In the US, the Fed raised rates as broadly expected and signaled four rises until the end of 2019. However, the removal of the words “accommodative policy” initially hurt the greenback. Fed Chair Powell’s optimistic message and his clarification that the outlook had not changed eventually sent the greenback higher. US data was mixed, yet mostly positive.

Updates:

EUR/USD daily chart with support and resistance lines on it. Click to enlarge:

  • German Retail Sales: Monday, 6:00. Consumers have disappointed in the continent’s largest economy. After a drop of 0.4% in July, an increase of 0.4% is on the cards for August.
  • Manufacturing PMI: Monday, 7:15 for Spain, 7:45 for Italy, final French figure at 7:50, final German at 7:55 and the final euro-zone one for September at 8:00. Markit’s forward-looking gauge for Spain stood at 53 points in August, only slightly above the 50-point threshold separating growth and contraction. A drop to 52.7 points is on the cards. Italy had a score of only 50.1 and a minor increase to 50.3 is on the cards. The preliminary measure for September for France stood at 52.5, for Germany at 53.7, and for the full euro-zone at 53.3 points. The initial numbers will probably be confirmed.
  • Unemployment Rate: Monday, 9:00. The jobless rate in the euro-zone is on a continuous decline. After 8.1% in July, another slide to 8.1% is on the cards for August.
  • Spanish Unemployment Change: Tuesday, 7:00. Spain, the fourth-largest economy, still suffers a high unemployment rate. After an increase of 47K in August, the fresh figure for September is projected to show another rise of 28.2K.
  • PPI: Tuesday, 9:00. The Producer Price Index rose by a healthy 0.4% in July. An increase of 0.2% is forecast for August. Prices at factory gates eventually reach consumers.
  • Services PMI: Wednesday: 7:15 for Spain, 7:45 for Italy, final French figure at 7:50, final German at 7:55 and the final euro-zone one for September at 8:00. The Spanish services PMI stood at 52.7 and is now projected to move up to 52.9. Italy’s figure stood at 52.6 points in August and also here, a small increase to 52.8 points is on the cards. The initial read for France’s services PMI for September was 54.3, for Germany 56.5, and for the euro-zone 54.7 points. These numbers are expected to be confirmed.
  • Retail Sales: Wednesday, 9:00. While the main countries will have already published their consumption data, the overall number for the 19-country currency bloc can surprise. An increase of 0.2% in August is predicted to follow the 0.2% drop in July.
  • German Factory Orders: Friday, 6:00. Orders at factories fell by 0.9% in July, short of expectations. An increase of 0.7% is now projected at this volatile measure.
  • * All times are GMT

    EUR/USD Technical Analysis

    Euro/dollar made a move to the upside and temporarily breached the 1.1800 level mentioned last week. It then turned sharply lower.

    Technical lines from top to bottom:

    1.1915 was the low point in January and remains relevant. 1.1850 was the peak on June 14th, before Draghi sent the euro down.

    1.1815 was the high point in September.  1.1750 held the pair no less than four times in July and remains a powerful level.

    1.1720 is a veteran line that worked in both directions and it capped the pair in mid-September. 1.1650 was a swing low in late August and is very closely followed by 1.1615 which played a pivotal role.

    1.1.1570 was the low point as September came to an end 1.1530 supported the pair twice in August, making it an important line. 1.1435 held the EUR/USD down when it was trading around the yearly lows.

    1.1300 is a round number that held the pair in mid-August and also held the pair down in June 2017.

    I remain bearish on EUR/USD

    The Italian issues are far from being resolved and low inflation also weighs. In the US, the Fed remains on course to raise rates four more times until the end of 2019, and this supports the greenback.

    Our latest podcast is titled Too hot or too cold? The world is watching the Fed

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    Further reading:

    • GBP/USD forecast – Pound/dollar predictions
    • USD/JPY forecast – analysis for dollar/yen
    • AUD/USD forecast – the outlook for the Aussie dollar.
    • USD/CAD forecast – Canadian dollar predictions
    • Forex weekly forecast – Outlook for the major events of the week.

    Safe trading!


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