Euro falls by most in seven weeks on Italian political concerns

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28 September 2018

thomasdodds

The Euro remained firmly on the back foot this morning, and during London trading on Thursday, with concerns regarding the Italian government’s budget thrusting European politics back into the limelight.

E
arlier on Thursday it was reported that officials within the Eurozone’s third largest economy had reportedly been at loggerheads over the country’s budget plans, which it was speculated could have delayed a budget announcement. An agreement was, however, reached overnight, although even this was met with a broadly weaker common currency, given the markets sceptical view on the country’s spending plans.

Italy currently has one of the largest government debt-to-GDP ratios in the world in excess of 130%, with plans to increase spending and inflate the already lofty budget deficit concerning investors over the country’s fiscal sustainability. It had been speculated earlier in the week that Italy’s Economy Minister Giovanni Tria was ready to resign following the row, although these fears appear to have been overblown.

A speech from ECB President Mario Draghi failed to touch on monetary policy yesterday. Next up will be this morning’s Euro-wide inflation numbers and Germany unemployment figure, although both are expected to remain unchanged.

Brexit concerns weigh on Pound, UK GDP revised lower

Sterling was similarly on the defensive on Thursday, and then again this morning, slipping by around half a percent as investors continued to fret over the possibility of a ‘no deal’ Brexit. With the clock ticking until the 17-18th October EU summit, time is running out and each day that passes with no positive developments is increasingly becoming ‘no news is bad news’ for the Pound. During trading yesterday, foreign minister Hunt heightened concerns over a collapse in talks, acknowledging that a ‘no deal’ scenario was possible.

Updated UK GDP numbers for the second quarter this morning also far from helped, coming in at a downwardly revised 1.2% YoY. With economic data largely taking a backseat, the Pound will likely be driven almost exclusively by Brexit news once again this afternoon.

US Dollar index rallies to two week high

With the Euro and Sterling both struggling, the US Dollar index rose back to its strongest position in two weeks. Much of the move was largely attributed to seasonal factors and month end flows, rather than any meaningful news out of the US economy.

Mostly second tier economic news to end this week this afternoon, with the latest PCE inflation numbers unlikely to rock the boat, despite its fairly significant impact on Federal Reserve monetary policy decision making.