19.10.201815:32 Forex Analysis & Reviews: EUR / USD: China, Italy and the revived dollar

Various factors put pressure on the euro including the problem of the Italian budget, the slowdown of the Chinese economy and the failure of the Brexit talks. Euro weakness allows dollar bulls to the test weekly EUR/USD lows without any extra effort.

The bears of the EUR/USD pair were able to overcome the mark of 1.1460 and they are currently trying to gain a foothold below this target. The importance of this level is explained by the fact that the breakout opens the way to a decline in the area of the formation of the 14th figure and to annual minimums in the future.

Today, the macroeconomic calendar for the pair is almost empty. The interest is perhaps the statement of the Fed representative Raphael Bostic and the release of data on sales of secondary housing in the United States. However, these fundamental factors are unlikely to drastically change the mood of traders as the market is now focused on larger issues.

As mentioned, one of the problems discussed is the slowdown of the Chinese economy. In annual terms, China's GDP fell to 6.5% from the previous value of 6.7% (while experts expected a decline to 6.6%). The volume of industrial production also decreased up to 5.8% from the previous 6.1%. The published figures show the negative impact of the trade war on the Chinese economy and results affecting the growth rate of the world economy. Officials from Beijing has already commented on the published figures, recognizing the negative impact of the "external environment". Despite the Chinese are optimistic about future prospects, traders of the EUR/USD pair did not share their opinion, for the most part, while getting rid of the euro.

The slowdown in the global economy is one of the reasons why the ECB may not be in a hurry with tightening monetary policy. Mario Draghi has repeatedly spoken about this, albeit in a very veiled form. The Chinese data is unlikely to change the intentions of the ECB members to complete a stimulating program this year. But, on the other hand, it can soften their rhetoric on the next steps.

The euro is still under pressure from the Italian budget. The European Commission rejected the draft financial document and Rome will again be forced to discuss the size of the estimated budget deficit. In addition, the market is discussing the likelihood of enforcing a deficit reduction. Let me remind you that in the European Union there is the "Pact of Stability and Growth", which sets the upper limit of the budget deficit of each country, equivalent to 3% of GDP. The Italians did not formally exceed this target, however, they violated earlier intentions to reduce this figure to 0.8%, given a large amount of external debt.

Therefore in the coming months, the European Commission may begin the procedure of forced reduction of the deficit. For Italy, they will develop an individual financial plan, which may include not only reforms but also the "extra-budgetary" economic regime. Such measures can lead to lower budget spending, reduced economic activity and increased unemployment. For example, this procedure has been valid for France and Greece (currently withdrawn), meanwhile for Spain, the procedure has been in effect for nine years now since 2009. If Italy "makes a company" to the Spaniards, then the pressure on the euro will increase due to the growth of anti-European sentiment among the country's residents and politicians (who do not have a particular love for Brussels).

The EU summit last week only confirmed the irreconcilability of the parties to the Brussels-Rome conflict. Other countries of the Alliance, in particular, Austria supported the leadership of the European Union in the matter of the Italian budget. For example, the Austrian prime minister said that his country "is not going to pay for other people's debts." Representatives of other countries took a similar position. By the way, the outcome of the October summit did not bring any significant breakthrough on any of the issues under discussion. Brexit remained in limbo as the parties were only able to agree on a possible extension of the transition period. although this issue could be perceived "in hostility" by the British parliamentarians. If these fears are confirmed, the likelihood of a "hard" Brexit will increase again, putting pressure on both the pound and the euro.

Against the background of such prospects, the rhetoric of Mario Draghi yesterday faded into the background. Although, the head of the ECB rather positively assessed the state of the European economy. Also, traders actually ignored the words of the head of the Central Bank of Finland, who predicted an increase in interest rates in the fourth quarter of next year. Verbal factors have too little influence on the market, especially on the background of such an eventful week.

Given this amount of pessimistic and negative circumstances, the European currency will not be able to offer any distinct resistance to the dollar. The US currency looks stronger and more confident, having received support from the hawkish Fed protocol. Although members of the regulator discussed the outlook for monetary policy, the probability of a December rate hike increased again to 80 percent based on the August statistics. In dominating the EUR/USD pair, the dollar doesn't need a stronger reason - at least for now. The euro's weakness allows dollar bulls to test weekly lows without any additional effort.