What’s the Link between Italian Policy and the Euro?


Jun. 4 2018, Updated 10:03 a.m. ET

Euro struggling amid political uncertainty

The euro-dollar (FXE) exchange rate managed to move back above 1.16 against the US dollar (UUP) as Italy’s Five Star Movement and League formed a coalition last week. This relief, however, could be temporary, as after winning the confidence vote in the Italian parliament, the new government could comment on policy priorities, which could define Italy’s place in the European economy. If any new measures lead to further increases in deficits, there could be more strain on the EU-Italian relationship, which could be negative for the euro.

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European equity markets, which are tracked by the Vanguard FTSE Europe ETF (VGK) remained under pressure as political uncertainty in Italy and Spain remained in focus. The German DAX (DAX) closed the week that ended on June 1 with a fall of 1.7%, the SPDR Euro STOXX (FEZ) fell 1.8%, and France’s CAC 40 fell 1.4%.

Euro speculative bets continued to decline

As per the latest Commitments of Traders report, which was released by the Chicago Futures Trading Commission on June 1, speculators have decreased their bullish positions on the euro (EUFX) by 16,707 contracts as of May 29. The total net speculative bullish positions on the euro decreased from 109,744 contracts to 93,037 contracts.

The outlook for the euro

The key driver of the euro this week continues to be politics. The policy priority of the new Italian government will be in focus. If the government sticks to anti-EU rhetoric, we can expect the euro to slide, but a lack of negative rhetoric could lead to a sharp rebound in the euro this week. There are no major market-moving economic data coming from the European Union this week.

In the next article, we’ll analyze the rebound of the British pound last week.


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