EUR/USD: Focus on Italy-German bond yield differential

The EUR/USD chart is biased toward the bears.
Fears of impending Italian fiscal crisis and the resulting 10-year Italy-German bond yield differential would only bolster the already bearish technical setup.

Omkar Godbole FXStreet Contributor

The EUR/USD is on the defensive, having witnessed a pennant breakdown on Thursday and the fears of Italian fiscal crisis may accentuate the negative technical setup.

At press time, the currency pair is trading at 1.1565 and risks falling to 1.1508 (June 21 low).

The spread or the difference between the 10-year Italian government bond yield and German bund yield jumped 14 basis points (bps) to 254 bps in the last three days, indicating a rotation of money out of high-risk bonds and into safe-haven bonds.

The investors have likely turned risk-averse as Italy's new populist government seems to have embarked on a budget policy that could set off a more vicious round of Eurozone debt crisis.

The common currency could take a beating if the yield differential widens further, highlighting growing fears of the Italian debt crisis. Moreover, the yield spread daily chart shows a bull flag breakout - a bullish continuation pattern - which indicates a resumption of the rally from the April low of 114.5 bps and has opened the doors to a break above the May high of 282 bps.

As a result, EUR/USD could feel the pull of gravity of today.

EUR/USD Technical Levels

Resistance: 1.1575 (July 19 low), 1.1620 (July 27 low), 1.1665 (20-day moving average)

Support: 1.1527 (June 28 low), 1.1508 (June 21 low), 1.1463 (100-week moving average)

Yield spread daily chart

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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