- Upside in EUR/USD could be capped by Italian uncertainty and the sharp rise in Italy-German yield spread.
- EUR/USD could still eke out moderate gains on fears of FX intervention by President Trump.
EUR/USD eked out moderate gains on Friday despite the big rise in the Itlay-German yield differential and remains bid above 1.12 ahead of the London open.
Italy-German yield spread jumps on political uncertainty
Italy's far-right interior minister called for snap elections last week. The resulting political uncertainty saw Italy's 10-year government bond yield rise by more than 45 basis points in the last two trading days.
Notably, the spread between the 10-year Italian and German government bond yield jumped 29 basis points on Friday.
The yield differential may continue to rise in the EUR-negative manner today, possibly capping the upside in EUR/USD around 1.1250.
The pair, however, may still be able to carve out moderate gain the way it did on Friday, courtesy of growing speculation that China's decision to allow the Yuan to depreciate beyond 7 per US Dollar might force President Trump to go down the road of FX intervention.
"The sword of Damocles of interventions is hanging over the dollar," according to Commerzbank.
As far as technical charts are concerned, the outlook remains neutral with the pair trapped in a pennant pattern, as discussed earlier today. A pennant breakout, if confirmed, could accelerate the recovery rally from recent lows below 1.1030.
Technical levels
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