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  • EUR/USD reversed sharply from monthly highs, breaking key technical levels.  
  • A stronger US dollar and the Italian fiscal scenario pushed the pair to the downside on Friday.

The EUR/USD pair dropped on Friday for the third-day in-a-row affected by the announcement of the Italian government of a 2.4% budget deficit. Also, the comments from Italian officials added to concerns. The euro managed to recover ground during the American session but it was about to end Friday on a weak note.  

US data failed to boost the greenback in the market and EUR/USD moved off lows. The pair bottomed earlier today at 1.1569, the lowest since September 11 and then managed to rise back above 1.1600. The recovery was capped by 1.1625 and near the end of the week was trading at 1.1615, 135 pips below the level it had a week ago, the worst decline in almost two months.  

EUR/USD rejected from above 1.1800

Earlier over the week, the euro rose above 1.1800 but like what happened last week, it was rejected and pulled back sharply. It broke a short-term uptrend line, opening the doors to more losses from a technical perspective. Now the 1.1520/30 support is back on the radar.  

The retreat from 3-month highs took place on the week the Federal Reserve rose the Fed fund rate for the third time of the year and signaled another hike in December. When the euro was looking to make a clear break above 1.1800 dropped back to the average price of the last five months. Over the short-term, monetary policy expectations could continue to provide support for the US dollar but it is not clear what could happen on a longer-term perspective.

“The next big move in EUR/USD is up when the first ECB hike draws closer and we forecast 1.25 in 12M. We still expect a steeper EUR yield curve on a 12M horizon. The ECB maintains a relatively tight grip on the short end of the curve, while the 10Y segment of the curve is pushed higher by rising US yields, the end of ECB QE and the pricing of ECB rate hikes in 2019-20. Our base case is still that the ECB waits until December 2019 to hike for the first time (20bp). While our euro area inflation forecast is in line with the ECB projection this year, our profile is lower for next year making a December hike more likely than a September hike. A 10bp hike is priced in by September 2019 and 20bp by December 2019″, wrote analysts at Danske Bank.