EUR/USD has Established Floor at Recent Lows: Citibank

Citi on the EURUSD outlook

© BruceG1001, reproduced under CC licensing

- EUR/USD showing signs of bottoming

- May have put in a 'hard floor' at recent 1.12-13 lows

- Technical hints of future upside and easing Italy risks

EUR/USD may have put in a floor at the recent lows, say analysts at Citibank, who argue the rebound over the last few days, diminishing Italy risks and technical support point to a potential long-term bottom being in place.  

The Euro rose to a session high of 1.1418 earlier on Tuesday before rolling over and falling steeply back down to the mid-1.1350s. The break lower came after New York Federal Reserve president John Williams, made optimistic comments about the outlook for growth.

The news that the Italian government have made compromises and is considering reducing the expected budget deficit for 2019 to 1.9 - 2.0% has reduced the risk of an escalation in the battle over the budget with the EU.

The latest news suggests Italian Prime Minister Conti has taken over budget negotiations from finance minister Tria, and that deputy PMs Di Maio and Salvini - who were previously dead against a compromise - are now more willing to accept the new 1.9-2.0% target, although Salvini later came out to say that he’s not working on a plan below 2.0%.

Italy’s more flexible response has almost removed one of three factors weighing on the Euro, according to Citibank analysis.

“Reports of Italian PM Conte’s compromise on the Italian budget are yet to be confirmed (and hence the hesitation in euro to rebound more solidly) but if true, would remove one of 3 factors currently undermining euro sentiment,” say Citibank.

The other two ‘albatrosses’ around the Euro’s neck are weaker Eurozone data and US considering levying tariffs on European car imports.

Weaker data includes the recent Eurozone Q3 GDP result, which undershot market expectations of 0.4% by coming out at 0.2%, and core inflation which slowed to 1.0% in November when a 1.1% result had been forecast. Unemployment also stalled at 8.1% after a long run of month-on-month declines.

As far as European Car exports go, the US is still weighing up whether to introduce increased tariffs. The news that General Motors (GM) is planning to close 3 plants and making 15k employees redundant was the catalyst for the administration to reconsider auto-tariffs on European vehicles.

The US has a wide auto part and car deficit with Europe which it is trying to use tariffs to close.  

“If we don’t fix the auto and auto part trade deficit and the Chinese trade deficit, we’re not going to get anywhere,” says Wilbur Ross, the US Secretary for Commerce in an interview with CNBC.

“The timing of this whole thing will largely be driven by what happens in negotiations,” says Ross. “China, we don’t really import very much in the way of cars but we do import some parts.”

Closer inspection of the technical picture suggests support for Citi’s notion of a floor being in place.

The weekly chart is showing the 200-week moving average (MA) underpinning the lows large long branch, and the formation of a key reversal bar (circled) three weeks ago. Finally, the exchange is also converging with RSI momentum in the lower panel, which is a bullish indication as it reflects waning bearish momentum accompanied the last low.

EUR to USD weekly

The daily chart below corroborates the bullish reversal motif promulgated by Citi and the bullish forces hinted at on the weekly chart.

The pair is potentially forming a bullish inverse head and shoulders (H&S) reversal pattern composed of three consecutive lows, the middle one of which is the lowest (the head) and the two either side raised slightly and comprising the ‘shoulders’.

EUR to USD daily chart

Confirmation of more upside comes from a break above the ‘neckline’ drawn along the intervening peaks of the H&S, currently located at circa 1.1420.  Such a move would then be expected to rise to a target at circa 1.1550-1.1600.

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