EUR/USD: Recovery rally to double bottom neckline likely if Italy-German spread drops below 300 bps

  • EUR/USD's pullback from 1.1622 may have ended at 1.1432 and the recovery rally could gather pace today if the Italy-German yield spread drops below 300 basis points. 
  • A double bottom breakout would be confirmed only above 1.1622. 

The EUR/USD pair created a bullish outside-day at the key support of 1.1432 on Friday, signaling the pullback from the Oct. 16 high of 1.1622 has likely ended.

However, a double bottom bullish reversal would be confirmed only after the pair has found acceptance above 1.1622. Further, the prospects of a rally to 1.1622 would rise if the pair closes today above 1.1535 (high of Friday's bullish outside-day candle). So, will the pair rally close above 1.1535 today?

It all depends on the action in the Italy-German bond yield spread.

On Friday, the ratings agency Moody's downgraded Italy's credit rank from Baa2 to Baa3 but maintained stable outlook. The investors were worried that Moody's may cut the nation below investment grade.

Essentially, Moody's decision fell short of investors' worst expectations, hence, Italian markets may witness a relief rally today. The spread between the 10-year Italy and German yields will likely drop below 300 basis points (bps), lifting the EUR/USD higher.

Should the spread remain above 300 bps, then the EUR/USD will likely struggle to move past 1.1535. At press time, the spread is seen at 315 basis points and the pair is trading at 1.1516.

EUR/USD Technical Levels

Resistance: 1.1535 (Friday's high), 1.1585 (50-day MA), 1.1622 (Oct. 16 high)

Support: 1.1463 (Oct. 4 low), 1.1432 (double bottom), 1.14 (psychologial level)

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