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EUR/USD: Downside exposed as Italy yield spreads spike, US-DE spreads continue to rise

  • For the EUR, the path of least resistance is on the downside as various yield spreads continue to widen in the EUR-negative manner.
  • The Italy-German 10-year yield differential widened to fresh highs since 2013 and looks set to rise even further on the EUR-Rome standoff.
  • The US-German yield differential is rising to new multi-decade highs each passing day.
The EUR/USD dropped to 1.1449 yesterday - the lowest level since Oct. 9 - and looks set to drop further to 1.14 as various yield spreads are rising in the EUR-negative manner.

For instance, the spread between the 10-year Italian government bond yield and its German counterpart rose to 3.25 percent yesterday, the highest level since 2013 and could rise further to fresh five year highs today as the European Union (EU) is not happy with Italy's planned budget deficit. The EU has reportedly called the budget plan as an 'unprecedented' deviation of the bloc's budget rules.

Further,  the two-year US-German yield differential rose to a fresh multi-decade high of 353 basis points yesterday and looks set to rise further as the Fed minutes released earlier this week revealed a growing consensus among the officials on the need for above-neutral rates.

And last but not the least, the technicals are biased bearish: 5-,10-, and 21-day EMAs are trending south, the 14-day RSI is bearish below 50.00 and the MACD has produced a bearish crossover. All-in-all, the support t 1.1432 could be breached soon.

Technical Levels

Resistance: 1.1463 (Oct. 4 low), 1.1493 (5-day EMA), 1.1519 (10-day EMA)
Support: 1.1432 (Oct. 9 low), 1.1422 (76.4% Fib R of 1.131/1.1815), 1.14 (psychological support)