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  • Italy concerns may keep the EUR on the defensive in Europe.
  • The sell-off in the common currency could gather pace as the Italy-German yield spread risks printing fresh five-year highs.

The EUR/USD could continue trading in the red in Europe as Italy’s fiscal profligacy could invite credit rating downgrade.

At press time, the EUR/USD is trading at 1.1570 – down 0.10 percent on the day – having printed a three-week low of 1.1564 yesterday.

The analysts at Goldman Sachs believe that Italy’s expansionary fiscal policy stance may not go down well with the ratings agencies, forcing them to downgrade the credit rating of the Eurozone’s third-largest economy.

The Italian bond markets are already showing signs of stress. For instance, the difference between the 10-year Italian government bond yield and its German counterpart jumped to 282 basis points yesterday and could print a fresh five year high above the Aug. 31 high of 290 basis points, in which case, the EUR may challenge the Sept. 10 low of support at 1.1526.

The Eurozone producer price index (PPI), scheduled for release at 09:00 GMT, is unlikely to have a big impact on the EUR pairs.

EUR/USD Technical Levels

Support: 1.1558 (50% Fib R of 1.1301/1.1815), 1.1526 (Sept. 10 low), 1.1497 (61.8% Fib R of 1.1301/1.1815)

Resistance: 1.1617 (5-day EMA), 1.1643 (50-day EMA), 1.1650 (Sept. 19 low)