Italian political uncertainty spurred fresh euro selling in European trading on Tuesday, with the single currency declining against all of its major counterparts. EUR/USD hit a 10-month low prior to bouncing slightly ahead of the 1.15 handle. The pair is on pace to post a seventh consecutive week of losses in the absence of a spectacular recovery.
Headlines pertaining to Italian politics dominated the markets as investors fled from risk assets. Equity markets were under pressure globally, while safe-haven currencies such as the Japanese yen and Swiss franc outperformed. Italy’s political woes extended into the bond markets, with the Italian and German bond yield differential widening to its largest level since 2014. U.S. Treasury notes extended lower, with the 10-year yield declining to around 2.8%.
With the exception of safe haven currencies, the U.S. dollar gained among its major counterparts in today’s European session. EUR/USD hit a low of 1.1510 in early trading, while GBP/USD reached a six-month low near 1.32 prior to finding some buyers. USD/JPY extended losses to fall below the 109.00 handle. The pair had made a sharp reversal early last week from a peak of 111.40 and posted a bearish engulfing candle on a weekly chart, providing a technical hint of bearish continuation this week.
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Political drivers have emerged for EUR/USD just as the theme of diverging monetary policy expectations has started to fade. In April, market participants had expected the European Central Bank to follow the Federal Reserve in tightening monetary policy, fully pricing in a rate hike in Europe for June 2019….