EURUSD Forecast: Rally Likely to Reverse on Italian Bond Yield Fears
Euro and US dollar:
- Italian bond yields and spreads warn of further downward pressure on the single currency.
- Latest EURUSD rally is running out of steam and may reverse lower.
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EURUSD Upside Remains Limited
The recent mini-rally in EURUSD has come to a halt after Italy reaffirmed that it would make no changes to its contentious 2019 budget, sparking fears that the EU could commence disciplinary procedures against Italy. The European Commission is said to be releasing a report on Wednesday. In advance of this, the Italian/German 10-year yield spread has widened out further, putting pressure on the single currency.
Italian and German 10-year Yield Spreads (December 2017 – November 20, 2018)
Higher Italian bond yields will increase Rome’s borrowing costs, putting the country’s finances under additional pressure. German government bond yields - the go to Euro-Zone haven – are now negative all the way out to seven years as worries grow, meaning borrowers are paying the German government for the privilege of buying German debt.
ECB President Mario Draghi warned last week that inflation in the single-bloc may not be rising as fast as previously expected, lending credence to market views that the central bank may have to dial back any interest rate hike until the end of 2019. The German Finance Minister Olaf Scholz also recently admitted that the German economy – the Euro-Zone’s engine - faces several headwinds including Brexit, confirming fears over a continued slowdown. Preliminary Q3 German GDP figures released recently showed the German economy contracting by 0.2% q/q.
EURUSD recently rejected the 50-day moving average at 1.1470 and has turned lower. A break and close above here brings 1.1508 into play before the October 19 swing high at 1.1625 comes into view. On the way down, the 20-day moving average at 1.1372 provides the first level of support, followed by 1.1301.
EURUSD Daily Price Chart (May – November 20, 2018)
IG Client Sentiment Datashows investors are currently 47.2% net-long EURUSD – a contrarian bearish signal – however recent daily and weekly positional shifts give us a stronger bullish contrarian bias.
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