The Euro is set for a volatile period ahead as the political uncertainty in Italy rings alarm bells. The coalition government between the Five Star and Lega party are trying to fulfil on promises made before the election which will see taxes cut and government spending rising. This would have the effect of increasing Italy’s budget deficit which goes against the guidance from the EU on expenditure rules. Italy are not backing down for the moment and have said they will not be manoeuvred like Greece was three years ago.
Further to this Italy have warned of a financial disaster that would be global and this is creating uncertainty for the Italian banking sector. Italy’s level of debt sits at €2.3 trillion and so any additional uncertainty could cause new financial pressures which would be Euro negative. This battle between the EU and Italy is likely to drag out for the next 6-8 weeks as the plans move back and forth between the EU commission and the Italian government to try and find some sort of compromise.
There is a fear that Italy could now face a number of credit rating downgrades which would be unwelcome news for Italy, the EU and hence the single currency.
Brexit meanwhile is the main story and driving force for GBP EUR exchange rates this week. This Wednesday is likely to see major volatility when the EU are expected to offer a free trade agreement to the UK with extra concessions but without frictionless trade, something the British Prime Minister is insisting on. In fact the term from the Prime Minister and very specific in that she has insisted on a “precise” political declaration that will guarantee frictionless trade post Brexit. The uncertainty now arises from whether an agreement can be reached. The Irish border has been the main issue to date but now the issue of the political declaration on the future trading arrangement must be resolved.
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