EUR/USD – Italian budget crisis pulls euro lower

EUR/USD continues to lose ground this week. In the Tuesday session, the pair is trading at 1.1521, down 0.50% on the day. In economic news, Eurozone PPI edged lower to 0.3%, above the estimate of 0.2%. In the U.S, there are no major releases on the schedule. On Wednesday, Germany and the Eurozone release Services PMI and the Eurozone will publish retail sales. The U.S publishes ADP nonfarm payrolls and ISM Non-Manufacturing PMI.

The euro declined 1.2% last week, and the downward spiral continues. The EUR/USD is at its lowest level since mid-August, as it struggles to stay above the 1.15 level. With Italy and the EU on a possible collision course over Italy’s budget, the euro remains under strong pressure. The budget increases spending and cuts taxes and sets the budget deficit at 2.4% for 2019, 2020 and 2021. The European Commission must approve the budget, and EU policymakers are unhappy with the budget, as they have been pushing Rome to reduce the current deficit, which stands at 1.6% of GDP. EU Commissioner Pierre Moscovici said last week that the budget could breach EU fiscal regulations and called the Italian deficit “explosive”. However, the Italian government strongly backs the budget, so this crisis could continue to weigh on the struggling euro.

In the U.S, consumer spending and confidence levels remain strong. Consumer spending rose 0.3% in August, matching the forecast. The UoM Consumer Sentiment report pushed above the 100-level for the first time since March, although the reading of 100.1 missed the estimate of 100.5 points. On the inflation front, the Core PCE Price Index, which is the Federal Reserve’s preferred inflation indicator, dipped to 0.0% in August, shy of the estimate of 0.1%. This was the first time the indicator failed to post a gain since March 2017. Still, inflation remains close to the Fed’s target of 2%, so a December rate hike remains likely.

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Risk sentiment is shifting and headline-driven

EUR/USD Fundamentals

Tuesday (October 2)

• 3:00 Spanish Unemployment Change. Estimate 28.2K. Actual 20.4
• 5:00 Eurozone PPI. Estimate 0.2%. Actual 0.3%
• All Day – ECOFIN Meetings
• 10:00 US FOMC Member Quarles Speaks
• All Day – US Total Vehicles
• 12:45 US Fed Chair Powell Speaks

Wednesday (October 3)

• 3:55 German Final Services PMI. Estimate 56.5
• 4:00 Eurozone Final Services PMI. Estimate 54.7
• 5:00 Eurozone Retail Sales. Estimate 0.2%
• 8:15 ADP Nonfarm Employment Change. Estimate 187K
• 10:00 US ISM Nonfarm Manufacturing PMI. Estimate 58.1
• 16:00 US Fed Chair Powell Speaks

*All release times are DST

*Key events are in bold

EUR/USD for Tuesday, October 2, 2018

EUR/USD for October 2 at 4:40 DST

Open: 1.1578 High: 1.1580 Low: 1.1505 Close: 1.1521

EUR/USD Technical

EUR/USD was mostly flat in the Asian session and has posted considerable losses in European trade

• 1.1434 is providing support
• 1.1553 has switched to a resistance role after losses by EUR/USD on Tuesday. It is a weak line

Further levels in both directions:

• Below: 1.1434, 1.1300 and 1.1190
• Above: 1.1553, 1.1637, 1.1718 and 1.1840
• Current range: 1.1434 to 1.1553

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