Euro gains on Mattarella’s veto, but for how long?

On Friday, European bonds and the euro were captured by a regional risk-off trade. Political uncertainty in Italy was the dominant factor but there was also a growing chance of Spanish PM Rajoy losing support in Parliament. Government bond spreads of Italy and Spain, but also of Greece and Portugal, widened sharply. This European risk off trade also weighed on the euro. Eco data, including German IFO sentiment, were OK, but were no big issue for trading. German yields were hammered and fell below key support levels. EUR/USD dropped from the 1.1730 area to the mid 1.16 area. Still, the euro correction stayed orderly, taking into account the sharp repositioning on EMU bond markets. USD/JPY was hardly affected by the uncertainty on Europe. The pair held a sideways consolidation pattern in the mid-to low 109 area.

During the weekend, politics remained omnipresent. US President Trump changed course again on North Korea and indicated that a US/North Korea summit will probably still take place. In Italy, President Matarella rejected the choice of euro-sceptic Poalo Savona for finance minister. The euro shows some kind of a relief rally. EUR/USD is again trading north of 1.17. Asian equties are mostly trading in positive territory supported by the news on Korea, but USD/JPY hardly profits.

Today, the eco calendar is thin with US and UK markets closed. There are no important data. So the focus will remain on European politics. The single currency this morning shows some kind of a tentative relief rally. However, the question remains open whether the action of President Matarella will ease the anti-EMU feelings in Italy further down the road. After a protracted, almost uninterrupted decline of EUR/USD since mid-April, there is apparently room for a EUR/USD short squeeze. However, for now, there is not that much reason to expect a sustained rebound of the euro and/or a decline of the dollar. EMU political uncertainty is probably here to stay. At the same time, economic sentiment on the US might remain constructive with Friday’s payrolls the next high profile reference for markets to update their assessment on the Fed policy and on the dollar. EUR/USD rebounding north of the 1.1996/1.20 area would call off the ST downward alert. We consider this scenario unlikely in the short-term.

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