EUR/USD Analysis: Rallies despite Italian budgetary concerns

The US Dollar added to Friday's broad-based weakness, triggered by dovish comments by the Fed Vice Chairman Richard Clarida, and lost some additional ground on the first day of a new trading week. The greenback nosedived on Friday after Clarida, in an interview on CNBC, said that interest rates are nearing a neutral rate and warned of a slowing global economy. 

The anti-dollar flow helped the EUR/USD pair to continue gaining positive traction for the fourth consecutive session and build on last week’s goodish rebound from YTD lows, around the 1.1200 neighborhood. The pair climbed to 1-1/2 week tops, beyond mid-1.1400s, and seemed rather unaffected by widening Italian-German 10-year bond yield spread, which rose to the highest level in more than three weeks at 320 bps on the back of growing concerns about Italy's fiscal health.

The pair now seems to have entered a bullish consolidation phase and was seen oscillating in a narrow trading band through the Asian session on Tuesday. In absence of any major market moving economic releases, the USD price dynamics might continue to act as an exclusive driver of the pair’s price action. However, the ongoing bullish momentum might come to a grinding halt amid expectations that the EU might take the first step to discipline Italy over its 2019 budget deficit target by starting the procedure to issue sanctions on Wednesday.

Looking at the technical picture, the pair already seems to have confirmed a near-term bullish breakthrough over one-month-old descending trend-channel and was now seen trying to form a firm base around 38.2% Fibonacci retracement level of the 1.1815-1.1216 recent downfall. Hence, a follow-through buying interest should assist the pair to continue scaling higher towards reclaiming the key 1.1500 psychological mark en-route the 1.1520-25 supply zone, nearing 50% Fibonacci retracement level. 

On the flip side, the descending trend-channel resistance break-point, around the 1.1425-20 region, now seems to protect the immediate downside and is closely followed by the 1.1400 handle, below which the pair could slide back towards testing 23.6% Fibonacci retracement level support near the 1.1360-55 region.