EUR/JPY is sinking as the euro falls further on Italian coalition budget agreement - too close for comfort

Having insisted on a 2.4% deficit target, Italy's League and 5-Star coalition government agreed on a 2019 deficit at 2.4% of GDP during a late-night cabinet meeting in Rome to finance their election pledges while Finance Minister Giovanni Tria had tried to keep the shortfall to 2 percent. 

The Full details of the fiscal framework will be released on Friday and Italy has to submit its draft budget plan to the European Commission by Oct. 15th. The euro is weaker on this news, but the result is less than the European Union’s deficit limit of 3 percent of gross domestic product. However, the Economy Minister Giovanni Tria, an academic and not a member of either of the governing parties, has taken a more moderate line than the party leaders an had been pushing to keep next year’s deficit below 2 percent of GDP - seeking to adhere to the Commission's expectations that Italy would lower its structural deficit and satisfy Brussels  investors and settle bond yields - (Italian benchmark 10-year bonds and the safer German equivalent has more than doubled since the coalition published its program). Also,  the 3% spending limit is seen as just that - a limit, not a target and this outcome is perhaps running to close for comfort for the bond markets. 

"The previous government targeted a budget deficit of 1.6 percent of GDP in 2018 and 0.8 percent in 2019. But Tria said last month that next year’s deficit, without introducing any new measures, would be around 1.2 percent of GDP,"

- Reuters. 

What is troubling to investors, (hence lower euro), is that Italy’s economy, the euro zone’s third biggest, is slowing this year, and we have a government seeking to rid poverty with promises to reduce taxes and boost welfare spending, (a guaranteed minimum income for the poor).

Growth in Italian manufacturing slowed in August to the lowest rate in two years. Also, at the start of this month, the Fitch agency lowered the outlook on Italy’s debt rating and this outcome could be worrisome for Italy's creditors as it reduces the amount of money available for the government to bail them out. The euro will be under pressure if Italian bank stocks sink in the aftermath of this budget - (Italy’s FTSE MIB Index I945, -0.62%  was weeping down by 0.6% to close at 21,511.07 on Thursday).

EUR/JPY levels

Analysts at Commerzbank, however, argue that EUR/JPY remains immediately bid while above the 200 day moving average at 131.07 noting a deep support line down at 130.00 and while above here, their outlook is bullish and that the cross is capable of further gains - "EUR/JPY consolidating below the 133.48 April high and we would allow for a dip lower ahead of further gains. Above here lies the 135.24 1979-2018 downtrend line. Still further up sit the 137.51 2018 high and the 138.02 2008-2018 resistance line - Only below 127.85 would leave the market back on the defensive and suggest losses back to the 124.91 mid August low."