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The growth in yields on Treasury bonds, impressed by the strong statistics on US retail sales, the slowdown of the European economy led by Germany in the first quarter and the escalation of political risks after the creation of the coalition in Italy have become the catalysts for the EUR / USD collapse to the lowest level since December. Euro at the end of spring lost all key drivers, which allowed it to strengthen in 2017 against the US dollar by 14%. Then it was about the rapid growth of the European economy, rumors about the normalization of monetary policy, the defeat of eurosceptics in the Netherlands and France, as well as the inflow of capital into the financial markets of the Old World. About a year after the victory of Emmanuel Macron in the presidential election, EUR / USD traded 10 figures higher, but the situation is more like the beginning of 2017. This means that the risks of correction are growing.
Italy, with its unexpectedly formed coalition of "Five Star" and the League has become the catalyst for the collapse of the euro. In the tabloids, there was information that in the preliminary agreement between the parties there was a specific mechanism for leaving the republic from the eurozone and returning to its currency sovereignty. In addition, Rome was going to ask the ECB to write off debts worth € 250 billion. The European Central Bank purchased Italian bonds in the QE implementation process, and the coalition allegedly would refuse to repay them. In the document presented to the general public, these provisions were not found, but the emphasis of the future government on tax cuts and expansion of social spending indicates that it was decided to disregard the methods of fiscal consolidation in favor of economic growth.
Uncertainty about the integrity of the euro area and the violation of EU principles contributes to the flight of capital from the Italian securities markets. The yield of local bonds is growing, their differentials with German counterparts are expanding, which, on the one hand, indicates an increase in political risks, on the other, pushes the quotes of EUR / USD to the south.
Dynamics of EUR / USD and yield differentials of bonds between Italy and Germany
Everyone perfectly remembers the turmoil that rumors of a large-scale trade war brought to the market. The eurozone with its more than 40% share of exports to GDP is much more sensitive to them than the US and China, which have half the figures. Thus, the escalation of political risks in Italy could change the ECB's planned economic recovery times for the currency block and move the date of completion of the QE and raising the rates for a later period. The Fed, on the contrary, intends to aggressively tighten monetary and credit policy. This is evidenced by an increase in the probability of four increases in the federal funds rate in 2018 from 39% to 52%. The divergence is a powerful trump card in the hands of the "bears" in EUR / USD.
Technically continues the implementation of the pattern "Crab" with a target of 161.8%. It corresponds to 1.15. A necessary condition for the continuation of the southern campaign is a successful assault on 1.176 (78.6% Fibonacci of the last ascending wave).
EUR / USD, daily chart
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