Market Analysis

EURUSD: Markets Eye Italy Budget Talks

Euro bulls might have hoped for a calm start to the European session given that the euro wasn’t overly buffeted by Wednesday’s Federal Reserve rate hike but a report in Italy of a possible delay to Thursday’s Italian government budget meeting contributed to a dip in EURUSD in the late Asia session. It remains to be seen whether traders in Europe will feel that dip provides an opportunity to pick up euros at more attractive levels or whether the downward move has further to run. Certainly, the EURUSD has traded in Asia below its 10-day moving average at 1.1718, and that occurrence may have flushed out a few stale long euro exposures, but is that enough to justify a further run lower for the euro? Traders will have their own opinions, and much this morning may depend on headlines out of Italy, but there is a narrative that suggests neither the Fed announcement or the following press conference materially changed market expectations of the trajectory of US monetary policy tightening and that as a consequence fresh market demand for USD might be limited. Of course that narrative puts heavy emphasis on the USD side of EURUSD, but it might resonate with some traders especially if, as Denmark’s Danske Bank wrote of Italy on Thursday morning, “With markets now fully pricing in a budget deficit well below the 3 percent of GDP threshold, we would have to see a significant negative surprise to see any spill over to FX markets and naturally the EUR in particular.” But the core of the market’s problem, as regards Italy, might well lie in the fact that Danske Bank is correct and that the market will, therefore, be wrong-footed if events in Rome turn out differently.  It won’t suit those who see the euro higher but Dutch bank ING argued Thursday that it was “no surprise that EUR crosses have headed south on this news [out of Italy]” and that if there is any Italian budget delay it would be ING’s expectation for “EURUSD, EURJPY AND EURCHF to all move sharply lower.”

by Neal Kimberley, External Currency Analyst