Citi discusses the recent expectations for S&P to downgrade Italy's rating by Friday.

"The overnight move lower in EURUSD comes as Italian bonds drop amid reports of coalition government tensions ahead of the S&P ratings review this week. However, Italy’s coalition parties manage to reach a compromise on the introduction of debt-relief measures for Rome overnight. Nevertheless, markets remain concerned about the S&P review of Italy’s BBB rating on Friday, which is on negative outlook. Downside risks have risen as Italy’s DEF’s growth estimate of 0.2% for 2019 is below S&P’s 1.1%, and debt forecast of 132.7% for 2019 is higher than S&P’s 128.5%. However, Citi analysts think a downgrade is unlikely because – (1) the fiscal expansion is not been as bad as feared by the agency; (2) there is still a commitment to fiscal tightening in 2020; (3) there is already a downward qualitative adjustment to model-based rating; and (4) the rating is already lower than in 2011 (during the start of euro zone the sovereign debt crisis)," Citi argues.