EUR/USD: Rising political uncertainty in Italy is unlikely to trigger deeper correction – MUFG

The EUR/USD pair is currently testing support from recent lows between 1.2130 and 1.2150. Rising political uncertainty in Italy is expected to have a limited impact on the common currency, therefore, economists at MUFG Bank forecast euro/dollar trading within the range between 1.2000 and 1.2500 over the next months.

Key quotes

“We expect EUR/USD to trade within the higher range between 1.2000 and 1.2500 in the coming months rather than correct more deeply back into the 1.1500 to 1.2000 rage that was in place between July and November.”

“Investor sentiment towards the euro could be challenged in part by rising political uncertainty in Italy although the negative impact is more likely to prove limited. It was announced yesterday that three ministers from the ruling coalition have resigned placing the future of Prime Minister Giuseppe Conte in doubt. If he is unable to form a new majority, it is then possible the President will pave the way for a new government to be formed without him. Early elections during the pandemic are unlikely to be called until all options in parliament have been exhausted.”  

“The ECB’s PEPP has played an important role in providing support for the Italian debt market and should continue to dampen any negative fallout from rising political uncertainty after the ECB recently expanded planned purchases up to EUR1.85 trillion. Italy is also set to receive EUR208 B of EU Recovery Funds. There are concerns though that bureaucratic and admin hurdles will get away in the way of spending the EU money when it is dispersed between 2H 2021 until the end of 2023.”