- Italian bond yields spiked on Thursday on fiscal concerns, dragging the EUR lower with it.
- The Italy-Germany bond yield spread could rise sharply in an EUR-negative manner if ratings agency Fitch downgrades Italy.
- A better-than-expected Eurozone August preliminary inflation figure would be good news but could be overshadowed by the jittery Italian bond markets.
The EUR/USD created a bearish outside-day candle on Thursday as investor concerns over Italy’s fiscal health resurfaced, pushing the government’s borrowing cost to multi-year highs.
At press time, the pair is trading at 1.1665. A close today below 1.1642 (previous day’s low) would a bearish outside-day reversal, meaning the rally from the 1.1301 has ended and would open up downside towards 1.1530 (Aug. 23 low).
On the other hand, a daily close above 1.1718 (previous day’s high) would signal a continuation of the rally from the recent low of 1.1301.
The pair may suffer a bearish reversal if the ratings agency Fitch downgrades Italy, citing fiscal concerns, sending the 10-year Italy-Germany bond yield differential to fresh five years.
On the other hand, the yield differential could narrow sharply, helping the EUR regain yesterday’s losses if Fitch keeps Italy’s ratings unchanged. A better-than-expected Eurozone August consumer price index (CPI), due for release at 09:00 GMT, could only add to the positive tone around the common currency.
EUR/USD Technical Levels
Resistance: 1.1718 (previous day’s high), 1.1791 (July 9 high), 1.1852 (June 14 high)
Support: 1.1642 (previous day’s low), 1.1510 (May low), 1.1301 (Aug. 15 low)
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