Jane Foley, Research Analyst at Rabobank, notes that the sell-off in the EUR after the ‘no’ vote in the weekend’s Italian referendum proved to be extremely short-lived.
Key Quotes
“In the end it wasn’t the result of Italy’s vote that surprised but the extent of Renzi’s failure. Although this may mean that Renzi will not be asked by the President to form a caretaker government, the market has adopted a pragmatic view on the next phase of Italian politics. A caretaker government led by a respected politician is considered the more likely outcome for Italy. While this may not be the best case scenario for any country, this is unlikely to offer a direct threat to Italy’s position in the EMU. The risk of bank contagion still has to be managed and the 2018 elections still suggest the possibility of anti-EMU populist parties claiming more power in Italy. That said, the rejection of Renzi’s constitutional reforms means that the power base remains divided and there is less chance of a ‘strong man’ politician taking the helm. For now it seems that both Italy and EMU will continue to muddle through. Since the level of shorts has been creeping higher in recent months, this view has provided sufficient relief to push the EUR higher.”
“Potentially a bigger risk for EMU coherence is next year’s French Presidential election. Polls have been indicating that the populist Far Right leader Le Pen would lose in the second round of the election to the winner of the Republican Party primary. Surprising this has been won by the reformist Fillon whose Thatcherite policies include significant labour market reforms. Although this outcome would be popular with the financial markets, it would mark a significant change for France. Although an opinion poll published by Ifop-Fiducial suggests that Fillon would win 65% of the vote in the second round, many market participants are likely to retain a healthy scepticism of poll given their misleading implications for recent elections both in the UK and in the US.”
“As the April/May French elections approach, it is likely that the EUR will adopt a fairly binary relationship with French political news. Indications that Fillon will win are likely to be supportive while a boost to Le Pen’s support are likely to see the EUR softening in view of her calls for a referendum on France’s membership of EMU. The EUR could see some benefit from the Dutch elections on March 15. Although polls are indicating that the current governing coalition is unlikely to return to power, a Eurosceptic coalition seems unlikely and thus the outlook for EMU coherence could be given a boost. While the German elections later in the year could bring increased support to the Far Right, a more liberal governance is currently expected to prevail. This view, however, may be at risk if tensions over the migrant crisis surge again.”
“While it is our central view that Euro-scepticism will be kept in check next year, the clear rise of nationalism across Europe and uncertainly connected with next year’s elections suggests that volatility in the EUR is set to remain heightened. The experience of the GBP this year is testament to the potential impact on a currency of political uncertainty. That said, the EUR is likely to exhibit different behaviours to the pound as a consequences of positioning and the Eurozone’s healthy current account surplus.”
“Since the market is already short of EURs, it reaction to negative news should be lessened. The fact that the region has a very significant current account surplus (EUR25.3 bln in September) should also provide a cushion. Since it is our central scenario that EMU will continue to muddle through in the coming years and since it is our belief that the market’s US reflation expectations are overdone, we are forecasting EUR/USD at 1.10 on a 12 mth view.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD steady below 1.0800 after US PCE meets expectations
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair barely reacted to US PCE inflation data, with the Greenback shedding some pips. Fed Chair Jerome Powell set to speak ahead of the weekly close.
GBP/USD hovers around 1.2620 in dull trading
GBP/USD trades sideways above 1.2600 amid a widespread holiday restraining action across financial markets. Investors took a long weekend ahead of critical United States employment data next week. Fed Chair Powell coming up next.
Gold price sits at all-time highs above $2,230
Gold price holds near a fresh all-time high at $2,236 in thinned trading amid the Easter Holiday. Most major world markets remain closed, although the United States published core PCE inflation, the Federal Reserve’s favorite inflation gauge.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.