EUR/USD: Euro created inverted bearish hammer despite Italy budget hopes, focus on Fed speak

• Italy appeared open Monday to reducing its draft budget deficit, pushing the Italy-Germany yield spread lower. The EUR, however, wasn’t impressed and ended up creating a bearish inverted hammer.
• Dollar likely picked up a bid as treasury yields reported gains. The treasury yields may rise sharply if Fed’s Clarida, due to speak at 13:30 GMT, drops hints of an extended tightening cycle.

The EUR/USD created an inverted bearish hammer candle yesterday, adding credence to Friday’s bearish close below 1.1345 (50% Fib R of 1.1215/1.1472) and the bearish crossover between the 5-day and 10-day exponential moving averages (EMAs).

Notably, the bearish move happened even though Italy’s deputy prime minister Luigi Di Maio told Radio Radicale that his government is open to reducing the budget deficit. The bond markets responded positively to DI Maio’s comments. For instance, the spread between the Italian 10-year government bond yield and its German counterpart fell to 285 basis points – the lowest level since Oct. 5.

The EUR, however, was not impressed, possibly due to an uptick in the treasury yields. The 10-year treasury yield, for instance, jumped five basis points to 3.08 percent, likely due to fears that the scheduled speeches by the Fed officials, along with the FOMC minutes may call for a restrictive monetary policy (above-neutral interest rates).

Fed’s Vice Chair Clarida will be out on the wires at 13:30 GMT Later today, Fed bigwigs like Bostic, Evans, and George could offer clues on how far the interest rates could rise. The main event – speech by Fed Chair Powell – is scheduled for Wednesday.

That hawkish Fed speak would lead to USD rally is generally accepted by now. The rally (drop in EUR/USD), however, could be a big one as the investor community is way behind the curve, currently pricing less than two rate hikes for 2019 as opposed to Fed’s projection of three rates.

EUR/USD Technical Levels