At the start of the new week, the euro is being supported by the weekend updates of Moody’s ratings for Italy and Portugal. Last week, there was considerable speculation about the risk of Italy’s credit rating being downgraded to "junk" level. However, markets were able to breathe a sigh of relief over the weekend, as the rating was not only maintained but even improved. In Italy's case, Moody's kept the Baa3 rating, one notch above junk, but changed the outlook from negative to stable. This decision was a surprise to many analysts who did not expect any changes. The reasons given for the improved outlook included stable prospects for Italy’s economic strength, the condition of the banking sector, and public debt dynamics. In the third quarter, the Italian economy showed stagnation after a decline earlier in the year, and it is expected that Italy’s debt will slightly increase from 140% to 141% of national output by 2025. Despite these challenges, the Italian government, led by Prime Minister Giorgia Meloni, views the rating as confirmation of effective work and a promising outlook for the country’s future.
Even more positive was the credit rating assessment for Portugal. Moody’s raised Portugal's long-term issuer rating by two notches to A3 from Baa2, despite the country's political instability marked by the resignation of the prime minister. This upgrade reflects the resilience and stability of Portugal's economy.
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The market reaction to these updates has been positive, with a significant decrease in the risk premium for both Italian and Portuguese debts. The yield difference between 10-year Italian and German bonds, an indicator of perceived risk, fell to a two-month low, illustrating increased market confidence in Italian debt. The spread between Portuguese and German bonds also fell slightly.
The positive assessment from the agency also acted as a catalyst for the continuation of gains in the EURUSD pair. On Monday, the rate gained 0.24% and is increasingly approaching the psychological barrier of 1.10. For bulls, an important test will be the level of 1.094, which is both a resistance line and the 61.8% Fibonacci retracement level of the last downward movement. Source: xStation 5
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