EUR/USD stabilizes as the political environment in Italy and the UK improves
If the market is not going where it is expected to, it is likely to be moving in the opposite direction. Investors aren’t discouraged by the Italian political crisis, Brexit and the European economy’s slowdown. Moreover, they are actively selling the U.S. dollar amid the concerns about the pause in the Fed’s monetary normalization. If so, then why shouldn’t the EURUSD go up a little? Of course, the situation will be clearer in December, after the UK parliament votes on the divorce agreement with the EU and after the FOMC holds the meeting in December. However, the last week of November is also going to be hot.
Italy will hardly shake the financial markets before the end of 2018. They country has obtained about 95% of budget income for the current year, and so the government doesn’t have to worry about raising the funds from abroad in short-run. Yes, Rome faces the capital outflow of about €68 billion from the country’s bond market since the euroskeptics took power. Yes, to lure back foreign investors they need higher rates for the government debt securities than currently. However, if the country doesn’t lack the funds right now, should they worry about it? According to Société Générale, most of the negative, associated with Italy, has already been included into EUR/USD quotes. And the gap between Italian and German bond yields will be gradually approaching the value of 206 basis points.
Dynamics of foreign capitals flow to Italian government debt securities
Source: Financial Times
It will be different in 2019. Next year, Italy will have to raise about €260 billion and the country could face the EU sanctions. Italian policy makers and the EU have strong discrepancies in terms of the GDP and budget. And there is still no sign of a compromise. The Italy's government expects the country’s economy to expand by 1.5% in 2019. Italy’s national statistics agency suggests the GDP increase by 1.3%, the IMF and the Bank of Italy forecast the index to be at +1%. The projections affect both the budget deficit amount and the amount of national debt.
Dynamics of Italian GDP outlook
Source: Financial Times
The euro could be supported by an improved political situation in the UK. The pound has been quite responsive to the draft divorce agreement that is now to be approved by the EU; as well as to Theresa May’s statement that she reached an agreement with her Spanish colleague over Gibraltar. Remember, earlier Spain officials threatened to veto the deal if their demands weren’t met. If the EU and the UK parliament ratify the Brexit deal, many European currencies will benefit.
Dollar is pressed by the concerns that the FOMC projections may be revised, and Jerome Powell will sound dovish at the Fed meeting in December. After all, according to NAB, the regulator can change its rhetoric only in case of the US economy’s decline; and there has not been any sign of it so far. In the short-term, the EURUSD bulls can go ahead and storm the resistances at 1.147 and 1.1515, encouraged by strong euro-area PMI data. The ECB is still repeating the refrain about the gradual recovery of Eurozone economy. If purchasing managers prove this idea, the euro can well go on its rally.
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Price chart of EURUSD in real time mode
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