Political risk in Italy has added to downside pressure on the EUR this week as the market has been largely viewing political news in Italy as a sideshow and ignoring it until now, according to Greg Gibbs, Analyst at Amplifying Global FX Capital.
“It had seemed that the economic and financial recovery in the Eurozone was advanced and more resilient to political developments in the region.”
“Italy has been dealing with political instability of varying degree for some time. The recent phase of instability started to build after the failed constitutional referendum in December 2016, resulting in the resignation of the Italian PM and centre-left Democratic Party leader Renzi.”
“While the EUR/USD was weaker on Wednesday, it has recovered from its lows, and there has been little evidence of contagion to global markets. Emerging market assets rebounded from losses on Tuesday, despite news that the US-North Korea summit may be derailed. US Yields continued to creep higher, notwithstanding lower Bund yields.”
“EM markets may be taking some support from signs that the US is taking a more conciliatory tone concerning trade negotiations with China; including news that hardliner Administration Trade official Navarro will not take part in negotiations with the Chinese Vice Premier Liu He, in the USA this week for talks with US counterparts.”
“The scope for contagion to global investor confidence appears to have been significantly lessened by the ongoing support from the ECB for Eurozone assets.”
“The Italian developments have placed more noticeable pressure on the EUR exchange rate, seeing it weaken noticeably against the CHF in the last two days. It has fallen more significantly on Wednesday against a range of EM and commodity currencies.”