Market News & Insights
29 May 2018

The Italian Job Weighs on Europe

The euro has dropped over 1% in the last 24 hours and the biggest weight pressing on the single currency is coming from Italy. There has been numerous conflicting headlines and continued uncertainty and now we are looking at the possibility of fresh elections in autumn or the New Year following the failure to form an agreeable mandate for leadership. EURUSD has dropped into the 1.15’s and fresh 7 month lows, 1.1558 marks the 12 month lows and that’s our first major point of support. Italian bonds have been facing heavy selling this morning and that has been adding to the euro downside and while concerns of contagion are not yet pressing, the Italian Job shows just how fragile the region remains, despite almost a decade of restructuring and backstopping. The euro is currently exposed and volatile to Italian news and while the ECB are likely happy to see euro weakness, they would not want to see it and the risk of Eurozone and will no doubt step up to support Italian debt.

It was a bank holiday in the US and UK yesterday and as such both markets were closed. There was very little in the way of major headlines coming from the UK and Brexit chatter was at a minimum. And while sterling has advanced back towards the top end of its wide range, it still hangs around the 1.1450 area, we’ve only seen spikes above 1.1500 several times over the last year and have failed to hold above that level for any great period. GBPUSD however is under pressure, the stronger USD pressing the pairs back below 1.3300 and below the years opening levels. That amounts to a 16% round trip for GBPUSD since the start of the year so you can see how vital it is to look at hedging your currency risks as rates are in your favour. Now is certainly a prudent time for USD sellers to look at hedges vs GBP.

Later in the US session we have some consumer confidence data but at the current rate of USD appreciation a slightly lower reading is unlikely to knock too much pace from the greenback. Focus for the Dollar will turn to later in the week where USD GDP and Trade Balance highlights Wednesday’s calendar, PCE Inflation data due Thursday (the Feds preferred inflation metric) and of course the monthly rollercoaster that is Non-Farm Payrolls which is due for release on Friday.

Back to this side of the water and it’s a light enough calendar this morning with several ECB speakers on throughout the day but focus for markets will likely continue to be on Italy and what’s happening there. In terms of European data we’ll be looking at OECD forecasts tomorrow along with German Unemployment and CPI inflation figures, while Thursday is expected to show a considerable uptick in Eurozone inflation to 1.6% form 1.2%. The UK has nothing really to offer us all week until we get to Friday and Manufacturing PMI’s, otherwise we’ll just have to wait for Brexit headlines to knock us off guard.