EUR to take cues from Italian politics and Eurozone data - Westpac

According to Tim Riddell, analyst at Westpac, Italian political vulnerability has re-emerged.

Key Quotes

“Tension eased after EU reached agreement over Italy’s budget proposals in November. However, 5-Star support has steadily slid and it is now polling below a reinvigorated centre-left PD.”

“Right-wing Lega now leads polls and so Salvini moved to increase this stance into next week’s EU parliamentary elections by raising the potential of populist expansionary policies that could split the tense coalition and breach EU budget constraints. The widening of factions within the coalition are driving BTP-Bund spread back towards the extremes seen in late 2018 and also risk driving EUR lower.”

“Eurozone data continue to show economic stabilisation and ECB officials have stressed that the “green shoots” have affirmed the potential of achieving their forecasts and goals. Although the delay in US auto sanctions for 6 months is supportive, the rebound in EU activity is vulnerable and political strains during the EU elections are likely to weigh on core Eurozone yields and EUR.”

“The EU election period should restrict EUR/USD rebounds which seems unlikely to push towards 1.13. However, a potential base in the low 1.11s would only be threatened if Italian politics flared up further.”

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