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EURO ahead of Italian Elections & German Coalition

Market Analysis


ECB seen making only small tweaks to guidance next week. Bloomberg and Reuters surveys confirms that central bank watchers are pushing back expectations for a major change in guidance amid ongoing market volatility, a still strong EUR and dovish data releases including weak confidence data and a dip in headline HICP to just 1.2% y/y. Data since the last policy meeting has favoured the doves at the council, with confidence indicators correcting and headline inflation falling to the lowest level since late 2016. So while the hawks may be comfortable with a clear change in guidance, the doves can argue that market rates have already moved to a degree that implies a change in policy and that committing too early limits the room for the ECB to react at a time when not only volatility is high, but also uncertainty, not least on the political front.

After Powell’s testimonies and Trump’s tariffs announcements, the European Market’s focus turns into Italy’s general election this Sunday and the results of Germany’s SPD postal ballot of party members on whether to endorse their participation in a new grand coalition with the CDU and CSU. This week the Euro has presented a mixed performance against the major currencies, with US Dollar, Canadian Dollar and Sterling being the losers of the week. Save haven currencies, such as the Swiss (unchanged) while the Yen remains strong, particularly against the GBP and the single currency.  Meanwhile, EURUSD clocked a three-day high at 1.2322, extending the rebound from yesterday’s seven-week low at 1.2154,  reflecting a sanguine market view of political risks.

Italy’s election is unlikely to have a clear cut outcome with there being a high degree of undecided votes and a crowded field of participants. How well anti-immigration Eurosceptic parties, such as the Five Star Movement and Northern League, will be an issue, but the likelihood is there will be a hung parliament outcome. Hence no party is expected to reach the 40% in order to establish a government. The result will be officially announced on Monday.  Reuters poll gives 28.3% to the 5-Star party, 35.2% to the Forza Italia party ( including coalition with Brothers of Italy and Lega Nord) and 28.6% to the centre Left Democratic Party. An outcome, that will be opposed to the hung parliament scenario, is likely to weighs euro.

On the other hand, in Germany, Merkel is now about to clear that last hurdle for the confirmation of another grand coalition government under her. Merkel’s CDU had to concede major posts, including the Finance Ministry to the SPD, but until about 2 weeks ago there were still some doubts whether SPD party members would endorse the coalition. A Reuters poll this week found 56% of SPD members in favour, while Environment Minister Hendricks, of the SPD, said she expects support of 60%. Based on such announcements, a grand coalition for Merkel, suggests a stable German government, something which consider be significantly important for European Union. Hence this could positively affect Euro, by boosting it further up, to retest February’s highs at 1.2500-1.2550 area.


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Andria Pichidi

Market Analyst


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