EUR/USD Price Forecast: Two Huge Economies on the Brink of Recession?

  • EUR/USD remains stuck in consolidation mode, moving within a rising wedge pattern.
  • The Italian economy is on the brink of a full recession. Worries over the U.S. economy remain heightened.

EUR/USD for the past going on 11 weeks now has really done little in terms of big moves. The pair continues to trade within consolidation mode, a lack of committed market trend seen here. This seemingly being the case as both the Eurozone and the U.S. economy are in extremely delicate times right now.

Faltering Italian Economy

Firstly, looking at the Eurozone, the third biggest economy within the bloc is in trouble. Despite the recent scraping through of the country’s budget for 2019, several key underlying issues remain. Quickly skimming over key recent data points; according to the national institute of statistics, Italy’s economy shrank in Q3’ 18, a first since 2014. It contracted by 0.1% between July and September.

Elsewhere, the country’s unemployment was reported up 0.2% at 10.6%, which is well above the Eurozone average of 8.1%. Furthermore, most recently, it was reported that the European Central Bank has taken control of Italy’s Carige bank, on the back of majority of its board members resigning. This development expresses potential broader risks for another banking collapse, given the struggling Italian economy.

The ECB said in a statement, “Temporary administrators are tasked with safeguarding the stability of a bank by closely monitoring its situation”.

IHS Markit reported that Italy’s manufacturing sector had shrunk for a third straight month, another sign that the economy is on the brink of a recession. Italian business sentiment is at its weakest in six years and employment growth at the slowest in four years. New orders dropped for a fifth month, which has forced manufacturers to scale back production, according to IHS Markit.

U.S. Economic Dangers

Looking at the U.S. economy, there are growing fears the huge powerhouse could be edging towards a recession. One worry is that further rate hikes from the Federal Reserve could force an abrupt growth slow down, rather than allowing for a more natural easing. In addition, the risks of Trump’s trade war with China escalating is likely to have very damaging consequences for the world economy, has not helped sentiment by any means.

Above all, daily eroding is occurring to the economic picture of the U.S., given the prolonged partial government shutdown. This situation has now entered its third week, without any sign of agreement being made. President Trump stands very firm on his demand for the wall, that will cost $5 billion.

Technical Review – EUR/USD

EUR/USD daily chart. Price action is moving within a rising wedge pattern. Subject to downside risks.

Given all the above detailed for both respective economies, it is difficult to really understand how EUR/USD will commit in its trend. Price action is moving within an ascending wedge formation, which technically is subject to a breakout to the downside. The price, however, may be confined within this wedge for quite some time to come yet.

The downside risks are greater than any potential upside surprises. The reason for this view, is that there is more likely to be an agreement to end the government shutdown eventually. This is in comparison to any quick fix of the Italian economy, which could very well cause a domino affect across the Eurozone.

In terms of shorts, those would be attractive below 1.1345, which is the lower trend line of the wedge pattern. Additional shorts eyed below the current acting demand zone, tracking from 1.1270-1.1220. Regarding longs, above 1.1500, the upper acting wedge trend line and also an area of supply.

Featured image courtesy of Shutterstock.

Ken has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.