- EUR/USD eked out gains on Tuesday despite the political uncertainty in Italy.
- Tuesday’s gains could be short-lived if the prospects of snap Italian elections rise.
- Dovish Fed minutes needed to push EUR/USD higher to 1.1150.
EUR/USD rose 0.19% on Tuesday, ending the five-day losing streak. Tuesday’s gains, however, could be erased if the Italian yields rise due to political uncertainty and the Federal Reserve minutes validate Chairman Powell’s reluctance to cut rates aggressively.
Italy’s government collapsed on Tuesday, pushing the key European nation into a renewed period of crisis and uncertainty. Even so, the 10-year Italian government bond yield fell by more than five basis points.
The bond markets’ response indicates the investors believe the political crisis would be resolved soon potentially paving the way for a new coalition government.
Italian President Sergio Mattarella will begin two days of talks with parties today to seek a way out of a political crisis.
Italian yields will likely rise in the EUR-negative manner if talks begin on a negative note, forcing markets to price in snap elections.
Focus on Fed minutes
The U.S. Federal Reserve will release the minutes from the July Federal Open Market Committee (FOMC) meeting at 18:00 GMT today.
The Fed cut rates by 25 basis points as expected on July 31, but Chairman Powell refrained from signaling more easing.
The US Dollar will likely pick up a bid if the minutes validate Powell’s reluctance in starting a rate-cutting cycle.
EUR/USD could rise to 1.1150 if the minutes reflect the market’s concerns about global slowdown having a negative impact on the US economy. That would boost the odds of a Septembe rate cut.
As of writing, EUR/USD is trading at 1.1095, having hit a high of 1.1105 earlier today. Meanwhile, the 10-year Italian government bond yield is at 1.36%.
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