EUR/USD: Italy-German yield differential retreats from 5-yr highs ahead of ECB minutes

• The EC shot down Italy’s budget yesterday, still, the Italy-German yield differential eased back from 5.5-year highs, helping the EUR avoid a break below the Nov. 20 low of 1.1359.
• The EUR/USD could pick up a strong bid if the ECB minutes show the board members are unfazed by signs of economic slowdown and Italy concerns.

The EUR/USD charted an inverted bullish hammer yesterday, squashing hopes of bearish outside-day reversal below 1.1359, as the Italy-German yield differential eased from 5.5-year highs.

The spread between the 10-year Italian government bond yield and its German counterpart, which had reached a 5.5-year high of 327 basis points on Tuesday fell back to 311 basis points even though the European Commission (EC) rejected Italy’s proposed budget, paving the way for disciplinary actions called “debt-based excessive deficit procedure.”

While a bearish reversal has been avoided, the bulls are not out of the woods yet.  Moreover, they are seen gaining control above 1.1472 (high of Tuesday’s bearish outside-day). That move may happen before Friday’s NY close if the ECB minutes due today, downplay the recent slowdown in the economy and Italy concerns and reaffirm commitment to end the QE program in December.

The crucial support of 1.1359, however, would come into play if the ECB minutes show policymakers are worried about the rise in Italian bond yields and are considering abandoning plans to end the QE program in December. The selling could be intense if  minutes squash expectations of late 2019 rate hike.

EUR/USD Technical Levels