The EU Commission could be escalating its confrontation with Italy regarding Italy’s budget deficit. Italy’s deadline to deliver a revised budget, after the first draft was rejected by the commission, ends today. For the time being, there are no signs that the Italian government has any intentions to revise its current budget for 2019. EU officials state that, should Italy insist on maintaining the current level of deficit, it would be very difficult for the commission not to take any action, as it would undermine the credibility of the fiscal rules. It should be noted that there is still a long way for ultimate penalties to be imposed on Italy, however the first steps could be taken now. The implications of a confrontation between Rome and Brussels, could spill over to other issues and create a wider political instability in the Eurozone and the EU in general. As Europe braces for the escalation of the confrontation, the common currency may experience high volatility.

EUR/USD dropped breaking consecutively the 1.1305 (R2) and the 1.1250 (R1) support lines, now turned to resistance. We see the case for the pair to continue to trade in a bearish market today as the downward trendline incepted since the 7th of November remains intact. Please note that the RSI indicator in the 4 hour chart has fallen below the reading of 30, implying a rather overcrowded short position for the pair. Also note, that the pair showed some signs of stabilisation during the Asian session today. If the bears continue to dictate the pair’s direction, we could see the pair breaking the 1.1200 (S1) support line and aim for lower grounds. Should the bulls take over, we could see the pair breaking the 1.1250(R1) resistance line and aim for the 1.1305(R2) resistance hurdle.

Choppy trading for pound as Brexit negotiations peak

The pound had a roller-coaster session yesterday against the USD, as Brexit negotiations defined the investor’s sentiment. Cable initially rose as media reports cited EU’s chief negotiator Michel Barnier as stating that the main elements of a deal were ready. However subsequently UK PM’s spokesman denied such a development, sending the pair back into the lows. Analysts point out that despite EU officials being more optimistic about a possible deal, the market has become more sceptical. Theresa May’s Brexit strategy has come under attack by all sides in the UK, including hard Brexiteers within her own party as well as the DUP, which provides for majority in parliament. The pound is expected to continue to be volatile as the Brexit negotiations are ongoing and a number of financial releases affecting it are due out.

Cable dropped further yesterday, breaking the 1.2920 (R1) support line (now turned to resistance) and bouncing on the 1.2850 (S1) support line. We see the case for the market to continue to favour the pair’s short positions and for our opinion to change, we would require cable to break the downward trendline incepted since last week’s heights. Should the pair continue to be under the market’s selling interest we could see it breaking the 1.2850 (S1) support line and aiming for lower levels. Should the market start favouring the pair’s long positions, we could see the pair breaking the 1.2920 (R1) resistance line and aim higher.

In today’s other economic highlights:

In today’s European session we get Germany’s final release of its HICP rate for October and the ZEW economic sentiment indicator for November, while from the UK we get September’s employment data. As for speakers, ECB’s Peter Praet, Sabine Lautenschlager and Luis De Guindos as well as Fed’s Lael Brainard and Philadelphia Fed President Patrick Harker, speak.

EUR/USD H4

• Support: 1.1200 (S1), 1.1153 (S2), 1.1110 (S3)

• Resistance: 1.1250 (R1), 1.1305 (R2), 1.1345 (R3)

GBP/USD 4H

• Support: 1.2850 (S1), 1.2780 (S2), 1.2695 (S3)

• Resistance: 1.2920 (R1), 1.3015 (R2), 1.3175 (R3)