EUR/USD: Risk-on & upbeat PMIs may not translate into major gains as Italy concerns linger

  • The EUR defended key support zone of 1.1440-1.1430 yesterday.
  • The European equities may pick up a bid, tracking the rally in Chinese stocks.
  • Above-forecast Eurozone preliminary PMIs would be a welcome development.
  • Still, the EUR/USD may remain depressed as lingering Italia concerns will likely keep the 10-year Italy-Germany yield spread above 300 basis points (bps).

The EUR/USD defended the key support zone yesterday, but a strong bounce may not materialize, courtesy of lingering Italy concerns.

At press time, the currency pair is trading at 1.1470, having clocked a low of 1.1461 earlier today.

The common currency avoided a channel breakdown in Asia, possibly due to an uptick in the Chinese stocks. As of writing, the Shanghai Composite is reporting a 1.5 percent gain and the S&P 500 futures have recovered losses to trade flat-to-positive.

As a result, the major European indices may report gains in early trade, helping stabilize the risk sentiment. Further, the EUR may pick up a bid if the Eurozone and Germany preliminary PMI numbers beat estimates.

However, gains, if any, will likely be short-lived as Rome and Brussels remain at odds over Italy's national budget.

Italy believes that the only way to cut public debt is by boosting economic growth. Meanwhile, the Commission believes Italy's growth assumptions are overly optimistic, making the debt reduction plan questionable.

Further, the commission has said that it would start disciplinary steps, called the excessive deficit procedure, which can lead to fines of up to 0.2 percent of GDP if Italy continues to ignore the recommendations to cut the deficit and debt.

As FXStreet's Joseph Trevisani states, the EU will soon find out whether its strangulation of Greece in the last few years has delivered the right message to Italy and other fiscally indisciplined nations.

As of now, it appears that Italy is in no mood to negotiate with the commission. No wonder, the spread between the 10-year Italy government bond yield and its German counterpart is holding above 300 basis points and may set fresh five-year highs above last week's high of 325 basis points, complicating matters for the EUR.

EUR/USD Technical Levels

Resistance: 1.1517 (10-day MA), 1.1550 (Oct. 22 high), 1.1589 (50-day MA)

Support: 1.1432 (double bottom), 1.14 (psychological support), 1.1301 (August low).

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