EURUSD Weakness Continues as Italian Yields Spell Danger
EURUSD News and Talking Points
- Rising Italian bond yields highlight mounting government risk.
- USD rally getting back on track after a period of consolidation.
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EURUSD Under Increasing Downside Pressure
Italian bond yields continue to move higher – ratcheting up the country’s borrowing costs – as the Italian political make-up continues to take shape. The coalition of the anti-establishment Five Star Party and the right-wing Northern League continues to cause concern in Brussels over fears that Italy will break EU budget rules and force a stand-off with the EU. These fears will increase further if Paola Savona becomes the new economy minister, as mooted. The 81-year old Savona is a vocal critic of the Euro and has said that Italy made a historic error joining the single currency.
Two-year Italian bonds now yield in excess of +0.34% compared to Germany’s -0.63%, while in the 10-year space Italian debt yields over 200 basis points higher than comparable German paper.
Fears now are starting to surface that rising yields in Italy may have a knock-on effect to other countries in the EU, especially Spain, forcing their borrowing costs higher. The 10-year Spain-Germany spread is now trading at its widest level this year.
And political fears continue to be priced into the single currency, forcing EURUSD lower by the day. In addition, the USD is looking to push further ahead after a short-period of consolidation, while traders should also be aware of commentary from the Fed’s Powell later on today. The chart shows that the 1.17175 level has been broken leaving the November 7 low of 1.15540 as the next likely target.
The latest IG Client Sentiment Indicator shows retail are 58.1% long EURUSD but recent positional changes give us a mixed trading bias.
EURUSD Price Chart Daily Timeframe (April 2017 – May 25, 2018)
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--- Written by Nick Cawley, Analyst
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.