EUR/USD Forecast: 3 reasons for breaking the double-bottom, now challenging downtrend support
|- The EUR/USD collapsed below the 1.1300 double-bottom to a 17-month low.
- The Fed, Italy, and Brexit are behind the downfall.
- The technical picture is bearish as the pair is not in oversold territory.
The EUR/USD is finally out of the range, and with a bang. The world's most popular currency pair broke below the double bottom at 1.1300 and reached a low of 1.1240 quite quickly. Cascading stop-loss points may have exacerbated the downfall.
There are three reasons behind the fall:
1) Brexit impasse
Negotiations between Brussels and London have not yielded a solution to the question of the Irish border. Moreover, talks within the British government are in a state of chaos. Supporters of a hard Brexit reject any compromise that PM Theresa May could offer. Pro-Remain politicians such as Justine Greenberg are also having their say, especially after Friday's resignation of Jo Johnson. Johnson was a junior, pro-Remain minister and the brother of former Foreign Secretary Boris Johnson.
All in all, there are growing concerns that no deal can pass a vote in parliament, regardless of the European Union's position.
2) Italy deadline
The third-largest economy in the euro-zone is due to respond to the European Commission by Tuesday. The EC rejected Italy's budget with its 2.4% deficit and rosy growth forecasts. The Italian government is convening to decide on the matter.
The ongoing clash is weighing on Italian bonds. Spreads between these securities and the benchmark German bunds is widening and hurting the common currency.
3) USD strength, Fed-related
The US Dollar took a hit on the US Mid-Term elections but then recovered. The Fed left rates unchanged but maintained its hawkish bias, with high expectations for a rate hike in December, the fourth this year.
The US Dollar is gaining ground across the board. US traders are off due to Veterans' Day.
EUR/USD Technical Analysis
The EUR/USD made a convincing breakout below the 1.1300 double-bottom. The Relative Strength Index on the four-hour chart is lower, but above the 30 level that represents oversold conditions. Momentum is to the downside, and the pair is well below the 50 and 200 Simple Moving Averages.
As the chart shows, the pair has been trading within a downtrend channel in the past few days. The collapse sends it to challenge the bottom of the channel, the downtrend support line. Break or bounce?
The Confluence Detector shows that the next line to watch is 1.1235, just below the recent low. Further down, 1.1210 awaits close by. The next level is 1.1100, last seen in June 2017.
1.1300 now turns into a line of resistance. It is followed by 1.1330 that supported the pair in late October. 1.1360 was a temporary support line in early November, and the round 1.1400 level served as support when the EUR/USD traded on the high ground last week.
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