Euro hit by Italian concerns

Rumours of request for debt forgiveness just the start.

The new Italian Government, a coalition between the anti-establishment Five Star Party and the far-right League, is set to send shivers through Brussels and Frankfurt as they formulate plans for increased public spending on what is already one of the Eurozone’s most indebted nations.It is rumoured that there are plans to ask the ECB to forgive two hundred and fifty billion euros of debt which if true will further instability even though here is no chance of such a request being granted. There is significant anti-EU feeling throughout Italy which led to the election of the two more extreme parties, so they are likely to feel they have the mandate to make radical demands upon Brussels.

The Euro, which has fallen by more than one percent this week, broke through the support at 1.1820 making a fresh 2018 low of 1.1763 although it has managed to rally a little as the dollar failed to again sustain a break of its strong resistance level (see below).

The drop in the euro, which has now lost five and a quarter percent since mid-April, is sure to influence inflation, but it is doubtful that it will stir the ECB into action. Yesterday’s release of Eurozone inflation data showed an unchanged result versus March with year on year inflation at just 1.2%

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Soft Brexit good, Hard Brexit bad mantra returns

There are rumours in the UK press that the Government is planning to propose that Britain remains in the customs union well after the current 2021 deadline.The pound reacted positively to this news ignoring the political fallout that this may bring. Having made a fresh low of 1.3455 earlier in the day, the pound clawed its way back above 1.3500 to close at 1.3505 and has rallied further overnight reaching 1.3570.

The headwinds facing the currency from Brexit, monetary policy and a stronger dollar could see the rally fizzle out as there are unlikely to be further positives to excite traders who have simply liquidated short positions at the low expecting to sell again into any rally.

The Government announced earlier in the week that it will produce detailed plans for the future relationship with Brussels early next month but the continued “buying of time” will soon have to stop. Theresa May is still wrestling with the Irish Border issue where she is “damned either way”

Next week’s inflation report will be the next scheduled event that will affect the pound but with the Brexit clock ticking down towards next March and the Government still unable to present cohesive proposals further weakness ahead of the data cannot be ruled out.

Dollar rally continues to hit strong resistance

While there continues to be significant support for a stronger dollar, volumes and buying interest are tending to peter out as the dollar index reaches strong resistance at 93.50. Yesterday it managed to breach that level briefly making a high of 93.63 but was unable to maintain a foothold and fell back to 93.13 which has also been its low overnight.The yield on ten-year Government bonds continues to move higher which is providing continued support to the Greenback. While other G7 currencies struggle with a stronger dollar, it is versus less prominent currencies that the dollar rally is being seen and felt the most. The Turkish Lira, Argentine Peso and Indonesian Rupiah are significantly lower with the Peso having fallen by twenty five percent this year.

President Trump’s recent foreign policy successes are having less effect now as the Singapore summit with Kim Jong-un is threatened and the effect of the opening of the U.S. embassy in Jerusalem brings continued unrest. It is the rising yield that continues to dominate and that could be a double-edged sword as it reflects concerns over the twin deficits that the President has, so far, ignored.