EUR/USD: Rally seen in Asia could be extended if Italy-Germany yield spread retreats from 5-year highs

• The EUR/USD jumped 50 pips in Asia and confirmed a bullish divergence of the relative strength index (RSI) on the 4-hour chart.
• Italy is planning to cut its budget deficit to 2 percent in 2021, a local newspaper reported in Asia and that put a bid under the common currency.
• The EUR/USD may rise well above 1.16 if the Italian bonds spike, sending the Italy-Germany yield differential lower from five-year highs clocked yesterday.

Italy may be bending to pressure from Brussels and its Eurozone partners to water down ambitious budget plans.

A local newspaper reported in Asia that the EU’s second most indebted nation is planning to restrict its budget deficit to 2 percent of GDP in 2021. As a result, the common currency picked up a bid and rose to a high of 1.1594.

The 50-pip rise in Asia confirmed a bullish divergence of the relative strength index on the 4-hour chart, meaning the sell-off from the recent highs above 1.18 has likely ended.

The pair may rise well above 1.16 if the spread between the Italian 10-year government bond yield and its German counterpart drops sharply from the five-year high of 302 basis points hit yesterday.

However, if the spread does not narrow sharply, then the EUR may surrender gains seen in Asia. The common currency may also take a beating if the US ADP employment report and US ISM non-manufacturing number, scheduled for release in the US session, beat estimates, sending Treasury yields higher.  

EUR/USD Technical Levels

Resistance: 1.16 (5-day EMA), 1.1640 (50-day EMA), 1.1660 (50% Fib R of recent drop)

Support: 1.1536 (session low), 1.1505 (previous day’s low), 1.1422 (76.4% Fib R of 1.1301/1.1815)