EUR/USD: Focus on Italy-German yield spread ahead of Italy budget deadline

• Italy has until Tuesday to submit a revised budget draft to the EU.
• Italy-German yield spread looks set to rise in the EUR-negative manner as Italy is unlikely to revise lower its expansive budget deficit target.

The EUR/USD could drop below 1.13 for the first time since June 2017 as the standoff between Rome and Brussels will likely lead to a widening of the yield spread between Italian government bonds and German bunds.

The currency pair registered marginal gains in Asia, possibly due to reports stating that Italy is considering to tweak the plan by lowering 2019 growth forecast to 1 percent to secure a budget deal with the European Union. The disputed fiscal deficit target, however, is set to remain unchanged at 2.4 percent, according to Repubblica.

Simply put, both sides remain far apart on key issues. As a result, the spread between the 10-year Italian government bond yield and its German counterpart, currently at 294 basis points (bps), will likely jump back above 300 bps, leading to a sell-off in the common currency. 

Notably, the widening of the yield spread would only bolster the already bearish technical setup: the EUR charted a third lower high at 1.15 last week, having topped out at 1.1815 in September.

At press time, the EUR/USD is trading at 1.1323. Rome has until Tuesday to submit a revised budget draft to the EU. 

EUR/USD Technical Levels