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- EURUSD slides as USD roars back to life on Trump comments.

- But seeds of recovery are sewn after Italy blinks in EU standoff.

- Scope for EUR to recover as tensions over budget clash dissipate.

The Euro ceded ground to a resurgent Dollar Tuesday and will struggle to recover this week, according to Commerzbank, even after Italy's government blinked in its budget standoff with the EU.

Commerzbank's call comes with the U.S. Dollar on its front foot following President Donald Trump's latest threats against China, and as markets grapple with a litany of political and economic risks looming over the Euro outlook.

"The euro is likely to struggle this week to establish itself above 1.14, since there simply aren’t enough arguments in its favour," warns Antje Praefcke, an analyst at Commerzbank, Germany's second largest lender.

Italy's government decided at a summit in Rome Monday that it will offer concessions to the EU in the hope of preventing an Excessive Deficit Procedure from being opened against the country, according to Italy's ANSA.

Lawmakers will delay until June 2019 the rollout of a "citizens income" that formed a central pillar in the Five Star Movement (M5S) manifesto and will also tweak plans to reverse earlier pension reforms.

The idea behind the concessions is to reduce the likely 2019 budget deficit by 0.2%, from an estimated 2.4% to 2.2%, although it is unclear whether the move will be enough for Brussels.

"These first signs of compromise could provide some support for the euro, although more concrete developments will be required for a more sustained turnaround," says Fritz Luow, a currency analyst at MUFG. "Even if the EC were to continue with the EDP, it seems likely that further escalation would become clear only towards the end of the year, with the imposition of fines potentially happening only after the European Parliament elections in May 2019."

The European Commission said last week that a debt-based Excessive Deficit Procedure under the enforcement arm of the Stability and Growth Pact is "warranted" after Italy failed to comply with instructions relating to its budget.

Following a March 2018 election Italy's new government had proposed a 2019 budget plan that, although delivering on its manifesto pledges, will have seen the budget deficit rise rather than fall in the 2019 and 2020 years.

Markets had been concerned that Italy's clash with Brussels and the EU's subsequent enforcement procedure would place a question mark over the country's commitment to the Euro and place in the European Union.

However, signs of a detente between the pair mean the market can now return its focus to more traditional drivers such as the bloc's economic performance and the European Central Bank (ECB) policy outlook.

The Euro-to-Dollar rate was quoted 0.17% lower at 1.1313 Tuesday and is down -5.7% for 2018, although the Euro-to-Pound rate was 0.24% higher at 0.8865 and has risen 0.21% this year.

Price action came as the U.S. Dollar rose broadly in response to President Donald Trump's attempt to heap pressure on China's leadership ahead of a key meeting of the two at the weekend. Trump is threatening more import tariffs if China does not agree to change its "unfair" trade policies at the summit.

"If the trend continues in early 2019, ECB concerns about the economic development of the euro zone might increase. If one adds the effect of the falling oil price – the next unpleasant development for Draghi – which suggests that inflation rates will fall again, the reasons for a first rate step in late 2019 begin to disappear. The market has already become much more sceptical in this respect," Commerzbank's Praefcke says.

Confidence about the German business outlook nosedived during October, according to the latest Ifo Business Climate index, which fell from 102.9 to 102 during the recent month.

October's survey came days after IHS Markit data showed Germany's mighty manufacturing sector growing at its slowest pace for more than four years.

That followed closely behind the latest GDP report, which showed the German economy contracting during the third-quarter after new regulations disrupted production in the car manufacturing sector.

All of the recent data has pointed toward a loss of momentum in Europe's largest economy, which is having an adverse impact on the Eurozone bloc's overall economic numbers, as well as sentiment toward the single currency.

"With a continued fall in the PMIs and oil prices the euro would lose the best argument in its support: the fact that the normalisation process will start in 2019. Depending on the data the ECB might change its forward guidance during the first months of the New Year," says Praefcke.

German bond yields have fallen in recent weeks, suggesting a darkening outlook for the economy and Euro, as markets responded to the deteriorating economic data and escalating row between Italy and the EU.

European Central Bank chief Mario Draghi noted the disappointing data in discussion with the European Union parliament Monday, although he stopped short of saying it would have any impact on future policy.

All of this is notable because the single currency's appeal to investors is hinged upon the bloc's economy growing at a pace sufficient enough to support a sustainable return of inflation toward the target of "close to but below 2%".

Only once that sustainable recovery of inflation is in sight will the ECB be free to begin normalising its interest rate structure, which is still calibrated to its crisis-era settings.

That "normalisation" of the ECB's interest rate structure is a prerequisite for any meaningful pickup in bond yields and the recovery of the Euro that this would bring.

"The driver of euro sentiment is the level of Bunds as much as anything else. 10yr yields at 35bp are inconsistent with any kind of euro revival and are lower than we have seen since September, when EUR/USD first fell to 1.13. technically, 1.12/1.1187 is the key level from here on the downside while 1.1420 is now the top of the downward-sloping channel that we seem firmly locked into," says Kit Juckes, chief FX strategist at Societe Generale. "The euro is badly lacking in yield support."

The ECB said in October it still intends to end its quantitative easing programme in December. That programme has kept continental bond yields pinned down at record lows for years, in order to stimulate the economy and stoke inflation.

But the bank also reiterated guidance that benchmark interest rates will remain at record lows at least "through the summer of 2019", which markets have taken to mean that a rate rise won't come until the end of 2019.

However, both those commitments were made at a time when the full extent of the third-quarter slowdown was not known and risks to the outlook were judged as still "balanced".

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