EUR/USD: Risk bounce to be short-lived if Italy defies EU over big budget spend

The EUR/USD pair found bids in Asia, courtesy of renewed US-China trade optimism, however, sustainability of corrective rallies, if any, is under question as Italy is expected to resubmit a largely unchanged and a high-spend budget to the European Union today.

Risk-on could trigger a recovery rally in the EUR

The S&P 500 futures picked up a bid in Asian and are currently reporting 0.6 percent gains. Meanwhile, the anti-risk Japanese yen is being offered. The market action indicates that the risk is being bought on easing trade tensions.

As a result, the European stocks may get off to a positive start, helping the EUR/USD regain some poise. The relief rally, however, could be a short one as Italy and Rome are likely to remain at odds over the budget deficit.

Italy to resubmit budget proposal today

The European Commission rejected Rome's budget outright last month - a first in the history of the European Union - gave Italy until to make necessary changes. In particular, the commission wants Rome to work on control the deficits.

Italy, however, continues to be adamant in stating that attempt to reduce the deficit to the previous goal of 0.8 percent of GDP would be "suicide".

So, it appears the troubled nation would resubmit a largely unchanged and big-spend budget to the EU, pushing the spread between the Italian 10-year government bond yield and its German counterpart to the recent high of 325 basis points. As of writing, the spread is seen at 306 basis points.

Technicals are biased bearish

The pair fell to 1.1215 yesterday, bolstering the already bearish technical setup, as represented by the series of lower highs, acceptance below the 50-month simple moving average (SMA), and the downward sloping 5-, 10-day SMAs.

To sum up, the path of least resistance is on the downside. The bearish pressure would weaken if the pair somehow finds acceptance above the 10-day SMA.

EUR/USD Technical Levels