- EUR/USD’s upside could be capped around 1.1250 on Italian political uncertainty.
- Italy-German yield spreads could rise sharply in EUR-bearish manner.
- A below-forecast German data could push EUR/USD below key support at 1.1177.
EUR/USD has picked up a bid while heading into the London open, however, during the day ahead, the upside could be capped by Italian uncertainty.
The currency pair is currently trading at 1.1196, representing 0.15% gains on the day.
The common currency ran into offers around 1.1230 on Thursday and ended the day on a negative note at 1.1180, forming an inverted hammer, likely due to political tensions in Italy.
Salvini pulls the plug on the government
The leader of Italy’s ruling League party and Deputy Prime Minister Matteo Salvini pulled the plug on government and said the only way forward was to hold fresh elections.
Salvini’s move reportedly prompted Prime Minister Giuseppe Conte to trigger a process that could lead to elections as early as October.
The heightened political uncertainty could lead to a sharp widening of the Italy-German yield spread in the EUR-negative manner. The 10-year yield differential spiked by 12 basis points yesterday.
As a result, EUR/USD may have a tough time extending gains above Tuesday’s Doji candle’s high of 1.1250.
The EUR may take a hit and drop below 1.1177, validating Thursday’s bearish hammer if the German data, due at 06:00 GMT, shows a sharp slide in exports in June.
In the US session, the focus would shift to the US Producer Price Index. Also, the ratings agency Fitch will be reviewing the rating outlook for Italian sovereign debt in the US afternoon.
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