EURUSD Sell-Off Continues as Italian Bond Yields Soar
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Euro, US dollar and Italian Bond Yields Talking Points:
- Italian bond yields and spreads hitting multi-year highs/wides.
- EURUSD looking likely to break below 1.1500 and head towards 1.1300.
We have just released our Q4 Trading Forecasts including USD and EUR.
EURUSD Roiled by Italian Bond Yields
Italian 10-year government bond yields hit their highest level in over four-and-a-half years as sellers drive prices ever lower as investors demand more return to hold Italian risk. The closely watched Italy-German 10-year yield spread touched 300 basis points in early trade, the widest in over five years, while further down the curve the Italy-German 2-year yield spread is now over 200 basis points. And to highlight the weakness in the Italy bond market, 10-year Greek bonds offer just 75 basis points more than Italy.
Italian bond yields have soared lately as markets worry that the recent Italian budget will be turned down by the EU – European Commission President Juncker has already warned that allowing the Italian budget would destroy the EU – while higher government borrowing costs (via higher bond yields) prompt fears of debt sustainability. And to add fuel to the fire, Claudio Borghi, economic head of the League party, has been quoted as saying that Italy ‘could solve most of its problems if it had its own currency’.
EURUSD Eyes One-Year Low
EURUSD continues to fall against this backdrop in the EU while the US dollar also continues to push higher, fueling the move. Just over one week ago EURUSD traded as high as 1.18154 compared to its current quote of 1.1530. The daily chart continues to look negative with the recent double touch low at 1.1508 under pressure which would open an eventual move all the way back down to 1.13010.
IG Client Sentiment Data shows that traders are split roughly 50-50 long and short EURUSD. However recent daily and weekly sentiment changes give us a bearish contrarian trading bias.
EURUSD Daily Price Chart (November 2017 – October 2, 2018)
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