Date: 20 May 2019

With the many other trouble spots around the globe, the problem of Italian sovereign debt has receded into the background for many investors. However, the results of the European elections on 23 to 26 May 2019 could turn the tide. If the Italian right-wing parties do well in the European election, not only could there be a confrontation between Italy and the EU but, if the right-wing parties do very well, new national elections could be possible in Italy.

For Deputy Prime Minister Matteo Salvini and his right-wing national Lega Nord, the projections predict a good result. Last week, shortly before the election, Salvini stated that he was prepared to raise Italy’s public debt well above the 60% of GDP threshold set by the EU stability criteria.

Yields on Italian government bonds have been rising again since March. In contrast, the 10-year German government bond will be traded below the 0 percent yield mark in March for the first time since October 2016. This is further widening the gap between northern and southern Europe.

The threat of political instability in Italy, combined with Brexit uncertainty and a possible weakening of the Chinese economy could weaken the European single currency.

A longer-term view of the chart shows that since the end of October 2018 the currency pair has been trading sideways at a high level in a wide range between US$1.145 and US$1.118.

The zone around US$1.118 should be decisive for the next few days. If the market leaps this level, the upper edge of the sideways movement at US$1.145 could offer resistance after overcoming the intermediate high at US$1.130.

If the market continues upward, there could be further resistance at US$1,155 and US$1,177.

If, on the other hand, the market heads downward, the first significant structural support may be at US$1.10, with further support at US$1.086, US$1.073 and US$1.06, respectively.

The MACD oscillator is showing the first signs of forming a bearish cross.

 

EUR/USD - daily chart. Source: ActivTrader

EUR/USD Daily Chart | Source: ActivTrader

 

Written by Daniel Schuetz, External Analyst, ActivTrades

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