Italian political uncertainty continues to weigh on the Euro

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30 May 2018

thomasdodds

Italian bond and stock markets crashed on Tuesday, while the single currency extended its sell-off, sinking to its weakest position against the US Dollar since July 2017, as investors reacted to the escalating political crisis in Italy.

T
he resignation of newly appointed Prime Minister, Giuseppe Conte, and effective collapse in talks between the populist Five Star Movement and the League, means that the country faces the prospect of fresh elections in the autumn. While Italian President, Matteralla, placed ex-IMF economist, Carlo Cotteralli, in interim charge of government, he is seen as a transitional figure by markets, and is unlikely to gain enough support to form a government.

The growing prospect of another election as early as September rattled the markets. Italian bond yields were hit particularly hard, with the yield on its 10-year government bond jumping by around 50 basis points in just one day to its highest level since 2014, highlighting the growing risk of holding Italian assets. Investors are becoming wary that the fresh election could provide a platform for an even stronger showing from the anti-establishment parties and Eurosceptic politicians that are pushing for an Italian exit from the Eurozone.

Amidst the uncertain political backdrop in Italy, the Euro has now shed 6.5% of its value since late-April. The fragile state of the currency suggests that additional losses could be on the cards in the coming trading sessions.

Sterling slips to November lows, US GDP data out today

Sterling remained on the back foot again on Tuesday, with the Pound falling to its weakest position against the US Dollar since November, albeit performing well against the Euro. The currency continues to be dragged down by growing doubts that the Bank of England will raise rates this year, with financial markets now pricing in a mere one-in-three chance that the central bank will raise rates before its November meeting. With no major economic releases scheduled in the UK this week, there also seems little that could convince investors to change their mind.

Escalating concerns in Italy helped lift the US Dollar index to its highest level since early November, with the market quick to forget last week’s fairly dovish set of meeting minutes from the Federal Reserve in favour of political developments. Investors will now look ahead to this afternoon’s revised GDP data for the first quarter. In the absence of any surprises here, Friday’s nonfarm payrolls report will be the big market mover this week in terms of data releases.