EUR/USD: Rising Italy-German bond yield spread may cap gains

  • The Italy-German yield spread hit highest since December on Wednesday and may rise further in the EUR-negative manner.
  • Italy's Salvini criticized the EU's budget deficit rules on Wednesday.
  • Trump to delay the decision on auto import tariff. The widening Italy-German yield differential, however, may cap gains in the EUR.

With Italy-German bond yield differentials hitting multi-month highs, the EUR/USD pair may have a tough time cheering reports of Trump delaying the decision on auto tariffs.

European Union budget regulations are "starving the continent" and must be changed, Italian Deputy Prime Minister Matteo Salvini said on Wednesday, according to Reuters and added further that Rome should break the EU's ceiling of 3% debt-to-GDP ratio and push debt to 140% of GDP, if required, to lower unemployment.

Salvini's comments sent Italian bond prices lower. Notably, the spread between the Italian and German two-year government bond yields rose to 140 basis points on Wednesday, the highest level since December. The 10-year yield differential also widened to a 3.5-month high of 284 basis points.

That likely capped gains in the EUR/USD pair, which ended largely unchanged on the day at 1.12, having hit a high of 1.1225 after news hit the wires that Trump is planning to delay the decision on auto imports by six months.

The EUR/USD pair is currently trading at 1.1208. Italy's stance on the EU's budget rules will likely keep Italian bond prices under pressure. As a result, the Italy-German yield spread could continue to rise in the EUR-negative manner.

Also, investors may continue to sell risk in response to Trump's decision to curb Huawei's access to both US markets and US suppliers.

Hence, the probability of the pair falling below the trendline connecting April 26 and May 3 lows is high. At press time, the trendline support is located at 1.1181. On the higher side, Monday's high of 1.1263 is the level to beat for the bulls. 

Apart from yield differentials and broader market sentiment, the EUR/USD could also take cues from German Bundesbank President and the European Central Bank member Weidmann's speech, scheduled at 08:15 GMT today. 

Pivot points

    1. R3 1.1274
    2. R2 1.125
    3. R1 1.1227
  1. PP 1.1202
    1. S1 1.1179
    2. S2 1.1155
    3. S3 1.1132


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