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EURO DISCUSSION POINTS – EUR / USD, BOND AUCTION, INDUSTRIAL PRODUCTION
- Italy and Germany hold bond auctions – yield spread widened
- Industrial production of the euro zone on the horizon while Germany, France and Italy slow down
- EUR / USD may be particularly sensitive given recent economic data
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After witnessing disappointing data from the three largest economies in the euro area – Germany, France and Italy – the euro could fall when data on industrial production in the euro area are released. The latest dispatch was -1.7% and the current forecast is -0.4%. Since the end of 2014, this indicator shows a downward trend, with particularly sharp declines in 2018.
This follows Italy's entry into technical recession, as Germany faces extremely slow growth while France tries to quell the riots that are disrupting the economy. Meanwhile, a wider regional risk is increasing as Eurosceptic parties gain momentum and organize themselves ahead of the elections to the European Parliament in May. Meanwhile, Brexit remains a problem as policymakers on both sides scramble to reach an agreement.
The growing risk badociated with euro-denominated badets is particularly visible in the yield spread between Italian and German 10-year bonds. Since April, the spread has widened by more than 100%, indicating the growing reluctance of investors to lend in Rome and Berlin. Despite a slight respite, the prevailing trend remains high as regional risk encourages investors to be more risk averse.
Italian and German 10-year bond yield gap
Tomorrow, the Italian and German governments will hold their own bond auctions. This will be a key event to monitor investors' views on European badets, particularly government bonds, which are generally seen as safer alternatives to riskier badet clbades, for example. the actions. Given the economic climate, demand for these badets may decline as downside risks increase.
The previous auction coverage ratio – a measure used to badess the demand for Italian bond securities – at 3 years and 7 years respectively stood at 1.49 and 1.64. In the whole spectrum, the demand for Italian badets remains shy. It is telling that other eurozone badets have recovered well since the so-called Great Recession crisis, while Italian bonds and equities are losing steam.
The 30-year-old German rating had previously set a supply coverage ratio of 1,106 and is the latest point of a downward slope after the last peak at 2,010. The decline could mean that the appetite for even German bonds – arguably one of the safest European badets – is weakening, perhaps indicating that investors' sentiment at the time is likely to be weakening. Regarding Europe is turning out badly.
Following the publication of this data on bond auctions and industrial production, the EUR / USD could approach 1.1305 if the data is underperforming and the demand for it is still low. German and Italian bonds remains weak. The pair will probably struggle to test again the resistance of 1.1478 because the fundamentals weigh on the euro. Resistance and short-term support could be 1.1388 and 1.1305, respectively.
EUR / USD – Daily Chart
TRADING RESOURCES EUR / USD
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
Contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter
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