- The US-German bond yield differential slips to multi-month lows amid escalating trade tensions.
- Italy pledges to play by the EU rule book.
- EUR/USD may come under pressure if the Eurozone and German PMI number are revised lower.
The narrowing US-German yield differentials will likely keep EUR/USD better bid on the first trading day of the week.
The currency pair is currently trading at 1.1185, representing 0.15% gains on the day, having hit a low of 1.1116 on May 30.
The spread between the US and German 10-year government bond yields fell to 233 basis points on Friday, the lowest level since April 2018. Meanwhile, the two-year yield differential fell to 260 basis points, the lowest level since February 2018.
With the escalating trade tensions between the US and China, a fed rate cut in December this year or in January of next year is looking increasingly likely. As a result, the yield differentials could continue to slide in the EUR-positive manner this week. It is worth noting that the market is currently priced for a half-percentage-point rate cut by year-end.
Also supporting the immediate bullish case is Italy's promise to respect the European Union's fiscal rules in its next budget.
“I wish to reiterate that the 2020 budget will be SGP (Stability and Growth Pact) compliant,” Tria said in his letter to Brussels, published late on Friday.
Notably, Italy's pledge to follow the EU's rules and the drop in the US-German yield differentials could help the EUR shrug off the political uncertainty in Germany - the leader of Chancellor Angela Merkel's junior coalition partner, the SPD, resigned on Sunday, raising concerns that the ruling government may collapse.
That said, the common currency may run into offers if the final Eurozone and German Manufacturing PMIs for May are revised lower from the preliminary estimates released a few days ago.
Pivot levels
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