Why Italian Election Uncertainty Drove EUR-USD Lower

Euro troubled by political uncertainty

Last week, the euro-dollar (FXE) exchange rate moved below 1.16 for the first time in six months, driven lower by Italian and Spanish political uncertainty. With no mainstream party in the lead, Italy could face another election in a few months. The election could give a lead to populist parties, which is seen as a threat to Italian membership in the European Union. Similar uncertainty exists in Spain, with Spanish Prime Minister Mariano Rajoy facing a thrust vote on June 1.

European equity markets, which are tracked by the Vanguard FTSE Europe ETF (VGK), fell in the week that ended on May 25 due to this political uncertainty. The German DAX (DAX) closed the week with a loss of 1.1%, the SPDR Euro STOXX 50 ETF (FEZ) fell 1.6%, and France’s CAC 40 fell 1.3%.

Why Italian Election Uncertainty Drove EUR-USD Lower

Euro speculative bets continued to decline

As per the latest Commitments of Traders report, which was released on May 25 by the Chicago Futures Trading Commission, speculators had decreased their bullish positions in the euro (EUFX) by 5,370 contracts as of May 22. Total net speculative bullish positions on the euro decreased from 115,000 contracts to 110,000 contracts.

Outlook for the euro

The key driver of the euro this week will likely be politics. The political climate remains uncertain and could lead to further losses for the euro against the US dollar (UUP).

On the economic calendar, we also have German and euro area inflation data, which aren’t likely to have a major impact on the euro this week as investors’ focus remains on politics. In the next article, we’ll analyze why the British pound is continuing to slide.