EUR/JPY: Keep your eyes on Italian yields

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Bond investors are closely watching the widening spread of both Italian bond spreads over the German and Spanish equivalent.  Surging interest rates have put a focus back on deficits and that is bad news for Italy.  The recent moves with Italian yields might allow the ECB to hold off on ending a bond-buying scheme early.  Italy’s budget framework sent their 2024 deficit goal from 3.7% to 4.3%. They also targeted a return to the EU’s 3% ceiling until 2026.

Italian 10-year bond yields:

Italy is in a lose-lose situation as their growth targets won’t be benefitting much from the added debt given the current macro backdrop.  Whatever aid the government unleashes will only provide a minimal boost given the current backdrop.  Eventually, they will be forced to get their finances in order and that will undoubtedly weigh on the outlook.

Market watchers are convinced that the ECB is done hiking but they might not be ready to abandon PEPP given how wide the Italian spreads may get.

EUR/JPY daily chart

If global markets remain on the defensive the EUR/JPY could see significant selling pressure as eurozone outlook remains one of the weakest ones across the advanced economies.  After consolidating for over the past few months between 155-160, positioning could easily see momentum selling dominate if the headlines continue support risk aversion.  If the 149.50 level breaks, major support does not appear until the 145.00 zone.  To the upside, 157.80 provides key resistance.

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