THINNER LIQUIDITY ON US HOLIDAY, EURUSD FORECAST, ITALY BUDGET– TALKING POINTS
- EURUSD may experience volatility as US market close for July 4 holiday
- Euro breathes sigh of relief as Rome and Brussels agree on budget deficit
- Italian 10-year bond yields plummet over 24% as Italy debt risks subside
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EURUSD VOLATILITY AHEAD?
The magnitude of EURUSD price swings may be amplified because US markets will be closed for the July 4 holiday. This may become particularly evident if breaking news erupts that causes investors to flock to the US Dollar amid greater risk aversion. In the absence of major critical data releases out of the US and EU, markets may take the time to re-assess the fundamental outlook.
A major developed that occurred this week was the decision by the European Commission to not begin the Excessive Deficit Procedure (EDP) against Italy. Rome revised its budget deficit down and narrowly avoided possibly incurring a $4 billion fine. The dispute between the EU and Italy gave markets a headache and was the leading cause behind the spike in Italian 10-year bond yields.
However, as tensions began to ease, investors perceived less risk associated with holding Italian sovereign debt, and the yield subsequently dropped almost 25 percent in 3 days, now trading at its lowest point since October 2016. For now, it seems, investors can breathe a sigh of relief as the third largest Eurozone economy is – for now at least – avoiding plummeting the entire region into a financial crisis.
WILL US STOCK MARKETS RETREAT?
Investors cheered this week’s achievement in the stock markets. The benchmark S&P 500 index reached a new high, breaking past the 3,000 barrier with the Nasdaq and Dow Jones achieving their own respective landmarks. However, negative RSI divergence is signaling slowing underlying momentum as US Treasuries continue to see significant capital inflows against the backdrop of alarming fundamentals.
CHART OF THE DAY: ITALY 10-YEAR BOND YIELDS AT THEIR LOWEST POINT SINCE OCTOBER 2016
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— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter