EUR/USD: Italy’s new government is not a market favorite

• The EUR/USD extends its gains in the wake of the new week and nears $1.2000.
• Italy will finally get a government, but it is a populist one and politics may return to the fore.
• The technical picture continues improving, but significant caps await.

The EUR/USD kicks off the new week where it ended the previous one: with a rise. The pair extends its gains, getting close to $1.2000 in a third consecutive positive day. The US Dollar is on the back foot remains on the back foot. The US inflation report on Thursday disappointed with Core CPI rising by 2.1% YoY against 2.2% predicted. This was the trigger for a long-awaited correction after the greenback gained a lot of ground. Weak data had accumulated, and the soft CPI data already sent the US Dollar down.

In the euro-zone, Italy is the center of attention. After more than two months of political deliberations, the third-largest economy in the euro-zone will finally have a government. However, this is not exactly the kind of government that markets have been waiting for. The 5-Star Movement and the League are both seen as populist parties that want to cut taxes and spend more, in a country which already has a high debt-to-GDP ratio. Moreover, politicians from both parties have been eurosceptic  and have suggested leaving the currency union in the past.

So far, markets are ignoring the new government,  but such events can leave the backburner and become front-page news.

European Central Bank member Françios  Villeroy said that raising rates is a matter of quarters, not years. We already know that the ECB is set to end bond-buying this year and begin increasing rates sometime next year. In the US, Federal Reserve member Loretta Mester said that the Fed is set to continue its path of gradual rate hikes but did not get into details.

The main event of the week awaits markets on Tuesday with the release of US Retail Sales. The Control Group measure will likely be the center of attention once again.

EUR/USD Technical Analysis

The pair broke above the steep downtrend resistance that accompanied the pair since mid-April. The upside move is not as steep and is also noted by a thick black line on the chart.

The recovery has the shape of the letter V. Does this mean victory for the EUR/USD? Not really.

The RSI still points to the downside, and the pair is outside the oversold territory. Also, the 200-day Simple Moving Average still caps the pair at $1.2010.

Immediate resistance awaits at $1.2000, which is a round number and has also capped the pair earlier this month. Further above, $1.2055 was the April 30th low, and $1.2155 was a swing low in March and also held the pair down when it attempted a recovery.

On the downside, $1.1915 was a low point in January and temporarily served as support in May.   The 2018 low of $1.1822 is next and far below; we find $1.1715.

More:  EUR/USD to $1.2000? Not so fast “” Confluence Detector