EUR/USD faces downward pressure amid Italian tax shock, global economic fears

• EUR/USD finished Tuesday’s session on a lower note lost 0.42%.
• The introduction of a 40% one-off tax on bank profits in Italy weighed on the Euro.
• A shrinkage in the US trade deficit amidst mixed signals by Fed officials boosted the US Dollar.

On Tuesday, the EUR/USD finished the day with losses of 0.42%, closing at around 1.0954 as risk appetite deteriorated on news that put a possible global economic slowdown into the table. In addition, news from Italy setting a one-off 40% tax on bank profits sent shockwaves across the Eurozone (EU), weakening the Euro (EUR). At the time of writing, the EUR/USD exchanges hands at 1.0956, registering minuscule losses of 0.01%.

Euro dips with Italy’s one-off bank tax and softer German inflation; meanwhile, US Dollar gains ground on solid trade balance figures

The EUR/USD’s fall was precipitated by Italy’s imposing a new tax. At the same time, inflation data from Germany eased from 6.4% in June to 6.2% YoY in July, as estimated by analysts. Month-over-month data also came at 0.3%, as foreseen and unchanged from June.

As inflation in the EU continues to drop, expectations for additional tightening remain subdued, with odds for September’s meeting at 35%, while for October hit 55%. Of note, traders should be aware the European Central Bank (ECB) is on data dependant mode, and sudden changes in monetary policy stances, like “hawkish” members like Klas Knot and Joachim Nagel turning more neutral, could push aside additional hikes by the ECB.

Across the pond, data bolstered the US Dollar (USD), a headwind for the EUR/USD, which extended its losses toward its daily low of 1.0928. the US Commerce Department revealed that its trade deficit contracted in June. Exports rose by $247.5 billion, below May’s $247 billion, while Imports slid to $313 billion from $316.1 billion the prior’s month. Consequently, the Trade Balance came at $-65.5, a tick higher than the $-65 billion estimated but below the previous reading of $-68.3 billion.

The Fed parade continued with the Philadelphia Fed President Patrick Harker stating the Fed “can leave interest rates where they are.” Nevertheless, he said, “Absent any alarming new data between now and mid-September,” the Fed can be “patient and hold rates steady.” Echoing some of his comments was Atlanta’s Fed President Raphael Bostic, saying no more hikes are needed.

On the hawkish camp, the Federal Reserve (Fed) Governor Michell Bowman stated that more rate increases are needed.

Given the backdrop and a light economic docket in the EU, EUR/USD traders focus on US data. Inflation figures will be revealed on Thursday, as well as unemployment claims. Upticks in inflation would be bullish for the greenback, hence further downside in the EUR/USD, as traders could speculate further tightening is needed. Nevertheless, according to analysts’ estimates, inflation is expected to cool down slightly, which could open the door for further upside.

EUR/USD Price Analysis: Technical outlook

From a daily chart perspective, the EUR/USD is set to extend its losses and test the last week’s low of 1.0912 before claiming the 100-day Exponential Moving Average (EMA) at 1.0901. Break of those two levels and the EUR/USD would dive toward the July 6 low at 1.0833 before challenging the 200-day EMA at 1.0795. On the opposite spectrum, if EUR/USD buyers step in and lift prices past the 20-day EMA at 1.1006, that would exacerbate a rally towards 1.1100.