Euro loses more ground as crisis deepens

Italian crisis drags Euro to fresh low

The standoff between the now failed coalition and the President deepened yesterday as the President’s choice of an interim Prime Minister was rejected by Five Star and League who called for peaceful demonstrations.

It is now becoming almost certain that Parliament will be dissolved, and fresh elections held with the possibility they could be as soon as July 29.

An accurate barometer of the seriousness of the situation, and how concerned markets are, is the rise in yield on Italian two-year debt which has leapt from 0.84% to 2.71% in a day with the ten-year reaching 3.19%. These levels represent a concern over default although we are some distance from such a scenario.

The single currency fell again making a low of 1.1510, the lowest level it has traded at since Mid-July. It has now fallen by 4.4% this month alone its largest monthly loss since the removal of the Swiss Franc peg in January 2015.

This level of volatility is unlikely to continue much longer as the market comes to terms with the crisis although uncertainty will remain until, and after, the elections are held whenever that is. The market had come to terms with an anti-establishment, anti-euro Government in Italy but emboldened by fresh election gains the coalition come become even more radical.

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Sterling keeps pace with the Euro

The pound rose close to the 1.1500 level versus the euro yesterday but still fell to 1.3205 against the dollar before recovering to close at 1.3248. It closed at 1.1484 versus the single currency.

Concerns have resurfaced about the prospect of a no-deal Brexit which have led to a continued drop in investment by businesses who remain on the sidelines, concerned about the lack of information they are receiving regarding their ability to trade after the UK leaves the single market and customs union.

Markets have been spooked by the intervention of the Bank of England in the discussions as it is felt that unless there had been a significant rise in risk they it was content to stay on the periphery.

Brussels patience is clearly also wearing thin as Chief EU negotiator Michel Barnier bemoans the lack of progress made since March. With proposals about the future relationship due for release in the next few weeks traders are girding themselves for more bad news and would probably accept further prevarication if a hard Brexit could be avoided.

Sterling has fallen so far from its April 17 high of 1.4377 that now the risk is for a significant correction were the Government to be able to “pull a rabbit from its hat” no matter how unlikely such an event is.

Dollar drifting ahead of data releases

Today’s release of growth data in the U.S. is unlikely to have a significant bearing on the dollar since it is both still a preliminary release and such a “rear view mirror” piece of information that the economy has moved on significantly, since the factors giving rise to the data have faded.

Nonetheless, the economy grew at a modest 2.00% in Q1 giving rise to a 2.3% year on year rise. This will hardly stir markets with an underlying view that short term rates are driven more by inflation than growth now since that is what voters are able to see most when going about their daily lives.

The dollar index rose again yesterday but it is purely reactive to moves by the pound and euro which are the current focus of the markets attention.

The dollar may see some reaction going forward as the trade conflict between the U.S. and China has flared up again with White House threatening to impose the $50 bio of tariffs it has announced if China fails to do anything about the theft of U.S. firm’s intellectual property rights.

The dollar may receive further impetus from a positive employment report, although given the volatility of the data a poor report is unlikely to see the lower, much lower.