EUR/USD: Widening Italy-DE yield differential is EUR-negative

Fitch downgraded Italy on Friday, Italy-German (DE) 10-year yield spread rose to fresh 5-year highs.
The EUR/USD closed below the 10-day moving average (MA), neutralizing the short-term bullish outlook.
The Italians come before rating agencies, deputy PM says.
The yield differential looks set to widen further in the EUR-negative manner, the chart shows.

Omkar Godbole FXStreet Contributor

Currently, the EUR/USD is flat-lined around 1.16 but could feel the pull of gravity in Europe if the spread between the Italian and German bond yield spread continues to widen.

Italians come before rating agencies

Rating agency Fitch downgraded Italy's debt outlook to negative on Friday, citing concerns about the government's "new and untested nature" and it promises to hike spending.

In response, Deputy Prime Minister Luigi Di Maio said that Italians come before the rating agency and added that the alliance made up of 5-Star and the far-right League party will move ahead with the main campaign pledge - a universal income for the poor.

As a result, the yield spread could continue to rise in the EUR-negative manner. A similar sentiment is echoed by an ascending triangle breakout - a bullish continuation pattern - and a convincing move above the resistance at 283 basis points (May high) seen on the 10-year Italy-German yield spread.

EUR/USD Technical Levels

Resistance: 1.1614 (50-day moving average), 1.1655 (5-day moving average), 1.1690 (Friday's high)

Support: 1.1585 (Friday's low), 1.1530 (Aug. 23 low), 1.15 (psychological support)

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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