EUR/USD stages strong rebound on ‘less negative’ headlines from Italian politics

• EUR/USD: turnaround midweek shinanigans  sees the euro fully reverse yesterday’s bloodbath in European politics’ price action.
• EUR/USD: risk-on, dollar weaker on data misses, DE inflation higher, DE/BTP spread narrows.
• EUR/USD:  staging a significant recovery and battling 1.1600.

It is turn around Wednesday today, with a rebound, at least in part, in the European bourses along with a strong reversal in the euro, squeezing the long liquidation back to 1.1675 the high so far at the time of writing as European politics come with a sigh of relief on headlines that The 5-Star Movement has called for Paolo Savona to withdraw his candidacy for economic minister and after headlines that Five Star’s Di Maio was said not be the seeking alliance with Lega.

The correction started in Asia from 1.1529, breaking 1.1589 and then 1.1639 in late London during a relative calm in the BTP space with bonds holding in there after early bids and yields were much lower compared to the highs seen yesterday.  

In the 10 year yields have seen a reversal of yesterday’s flight to safety as follows:

• Spain 1.551%, down 7 bps  
• Italy 2.949%, down 21 bps  
• Portugal 2.067%, -12.7 bps
• Germany 0.373%, up 11. 4 bps
• France 0.704%, up 4.8 bps
• UK 1.254%, up 5. 7 bps

(Note how Italy’s, Spain’s and Portugal’s yields have dropped, crucially narrowing the spread between DE(thought to be the safest bond )/ BTP as risk appetite returns.

At the same time, there had been some speculation that Five Star’s Di Maio would not be the seeking alliance with Lega according to ANSA, and that was euro positive. We also had some weaker data from the US and higher DE inflation, (US Q1 GDP second reading q/q annualized +2.2% vs +2.3% expected, ADP US May employment +178K vs +190K expected, Germany May preliminary CPI +0.5% vs +0.3% m/m expected).

The major European bourses have also made a partial comeback  compared to yesterday’s bloodbath:

• Spain’s IBEX rose 0.7%
• Italy’s FTSE MIB rose 2.09%
• Portugal’s PSI20 rose 1.38%
• German Dax rose 0.6%
• France’s CAC rose 0.5%
• UK FTSE rose 0.5%

However, the most recent headlines came in the last hourly stick with Reuters recently reporting that Italy’s 5-Star is calling for Paolo Savona to withdraw his candidacy for economy ministry in order to allow the government to be formed, calming nerves of that the populist movement is steamrolling back through the eurozone once again.  

EUR/USD levels

Yohay Elam, an analyst at FXStreet, explained that the EUR/USD is rising, staging a significant recovery and battling 1.1600:

“The Technical Confluences Indicator shows that the most significant convergence of technical lines is around 1.1650, which is the meeting point of the Simple Moving Average 5–one day, the one-month low, the one-week low, and the SMA 100-1h. A break of that line opens the door to 1.1720 which is the confluence of the Fibonacci 38.2% one-week, the SMA 10-1 day, and the Fibonacci 161.8% one-day.”

Meanwhile, to the downside, analysts at Commerzbank note the 1.1553 November low level and the 200-week ma at 1.1433 along with the 50% retracement of the move 2017-2018 at 1.1450.