The Euro has come under some pressure following the outcome of the Italian election which has resulted in a coalition between the League and Five Star Movement. The Italian President is expected to approve the deal but this anti-establishment party could create volatility for Euro exchange rates. Italy has a very high level of debt at €2.3 trillion which is the most out of all the EU economies. It’s worth highlighting that Italy is also the fourth largest economy in the EU.
The government is making plans to make sizeable changes to government policy including higher government spending and lower taxes. This of course comes at odds with the EU which seeks to manage debt and reduce the debt burden through austerity. There is a possibility that Italy could seek to withdraw from the EU altogether and this would be of major concern. If one recalls the Greek debt crisis the Euro came under major pressure in 2015 with rates for GBP EUR hitting a high of 1.44 for this pair. An Italexit in my view would be hugely damaging for the EU and Euro exchange rates.
EU data from the manufacturing and services sectors arrived slightly weaker than expected yesterday resulting in a small degree of Euro weakness.
The pound has fallen lower against the Euro after weaker than expected UK GDP data released yesterday pushed back those interest rate expectations from the Bank of England. It is now looking more likely that the next interest rate increase could come in November rather than August and this is putting pressure on the price of sterling. UK retails sales could give new direction for the pound and a bounce should be expected after such a bleak winter and the Beast from the East weather front that a caused a slowdown in growth over the period. Any improvement however may not be seen in today’s figures, we may need to wait for next month.
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