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Italy’s credit downgrade fails to erode Euro

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Italy’s credit downgrade fails to erode Euro

The European yield differential which is usually the driving force behind the movements of the EURUSD currency pair were barely affected by S&P credit ratings downgrade of Italian debt.  Economic data in the Eurozone continues to show softness compared to US data which has been relatively robust.  One item working in the EU’s favor was the solid 3-year treasury auction on Tuesday which helped push US rates lower by 3 basis points.

The impact of S&P’s decision to cut Italy’s credit rating to BBB from BBB+ Tuesday had very little effect on the currency markets.  The bill sale on Wednesday did produce a small increase in yields and the benchmark 10-year Italian bond yield edged higher by 5 basis points.  The downgrade brings S&P in line with Moody’s which is seen as a catch up for S&P while Fitch is still a notch above.  S&P also cut its growth forecast for Italy to -1.9% this year from -1.4%.

Weaker than expected European economic data seems to have had little effect on the currency markets.   Italy’s industrial production rose 0.1% in May, missing expectations for a 0.3%.  Italy also reported that nonperforming loans rose 22.3% year over year in May, the same pace as April.

The technical picture for the Euro is precarious despite today’s slight rebound in price action.  The EURUSD exchange rate tested support near 1.2745.  A close below this level would like test target support near 1.2660.  Resistance is seen near the 10-day moving average at 1.2934.  At the beginning of last week the 10-day moving average crossed below the 50-day moving average reflecting that a short term trend is in place.

Momentum on the form of the MACD continues to point to lower prices as the index is printing in negative territory with a negative trajectory.  The RSI (relative strength index) is printing near 40 which is on the low end of the neutral range but above the oversold trigger level.

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