EUR/USD: Political strife in Europe holding up euro's advance ahead of FOMC

Political strife in Europe is holding up the euro's advance and the standoff between Brussels and Rome is only set to escalate in the coming weeks. Th  |  08/11/2018 18:29
  • EUR/USD sinks to lowest levels of the day as we move into the FOMC in a dollar favourable environment. 
  • US yields pop in a risk-on session and DXY climbs from 96.09 the low to 96.45 the high.

Political strife in Europe is holding up the euro's advance and the standoff between Brussels and Rome is only set to escalate in the coming weeks. The spread between the Italian-German 10-year yield spread keeps moving close towards the 300 bps-mark while the two main coalition partners quarrel about measures that should restrict immigration (an important point for the League) and/or corruption (important for just(?) Five Star) as analysts at Rabobank pointed put:

"The government called for a confidence vote in the Senate to break Five Star’s resistance regarding the immigration measures." 

Politics turn in favour of the dollar ahead of the FOMC

Such issues are capping the euro's advance while the recent grounding in US politics removes a layer of uncertainty surrounding the US political landscape giving investors a green light to stay in US denominated assets and the greenback. US yields are perky with the 10-year yields reaching 3.23% while the DXY pops a high of 96.45 from 96.09 recent lows. 

With respect to the FOMC today,  an acknowledgement of recent tightening in financial conditions is unlikely, as noted by analysts at Deutsche Bank. "Outside of the statement, there will be some focus on whether or not the Fed make another “technical adjustment” by reducing the IOER by 5bps, to ensure that the fed funds rate continues to trade within its target range. Our team think this will be deferred until December when they can again raise the IOER by 20bps, though the exact timing is not especially significant in terms of monetary policy. As such we’d expect a strong signal in today’s minutes."

EUR/USD levels

The pair is testing a key support here at 1.1390 although it is not until the 2015 pivot line located at 1.1261 where bears can really take back control ahead of a run towards the 61.8% retracement at 1.1185. Favouring an upside bias, analysts at Commerzbank argued that the market will need to close above 1.1417 in order to alleviate downside pressure and initiate recovery to the mid-October high at 1.1623.
 

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