EUR/USD closed below 76.4% Fib despite oversold conditions, focus on Italy

• EUR/USD closed below 1.1790 - 38.2 percent Fibonacci retracement of Nov-Feb rally.
• The relative strength index (RSI) continues to show oversold conditions.
• Focus on Italy-German bond yield spread.

The EUR/USD closed below 1.1790 - 38.2 percent Fibonacci retracement on Friday and dipped to a fresh four-month low of 1.1744, despite the oversold conditions as shown by the RSI.

Further, the US 10-year treasury yield created a bearish outside-day candle, signaling the rallies in the yields and greenback may be due for a correction.

Still, the EUR/USD is showing no signs of life, possibly due to Italian political uncertainty and the resulting rise in the Italian-German yield differential. The 10-year Italy-German bond yield spread rose to four-month highs and the 10-year Italian yield jumped to a three-month high of 2.14 percent last week.

Italy's President is expected to confirm a coalition between the League and the Five-Star Movement (M5S) today. So, Italy is all set to have the most eurosceptic government in the region, so further widening of the Italian-German yield spread could widen further.

However, if the political uncertainty subsides, then EUR/USD may witness a corrective rally.

EUR/USD Technical Levels

A break below 1.1718 (Dec. 12 low) would expose support lined up at 1.1669 (Oct. 6 low) and 1.1662 (Aug. 17 low). On the higher side, resistance is seen at 1.1790 (76.4 percent Fibonacci retracement), 1.1822 (May 9 low) and 1.1845 (descending 10-day moving average).