European currencies suffer as Italian budget proposals are rejected by Brussels

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22 October 2018

thomasdodds

The European Union Commission made clear its displeasure with the populist Italian government budget proposal, putting Brussels on a collision course with Rome and adding to the negative sentiment surrounding the Euro.

S
terling also suffered as soft data led markets to push back against the timetable for Bank of England tightening. Euro and Sterling dragged down all other European currencies against the US Dollar, which only lost ground against the Australian and New Zealand Dollars in the G10.

Next week, focus comes back squarely to the October ECB meeting on Thursday. The meetings of the Bank of Canada, Riksbank and Norges Bank will also be key for their respective currencies. In the US, third-quarter GDP advance estimates on Friday will provide the main macroeconomic news of the week,

Major currencies in detail

GBP

No major releases in the macroeconomic or policy fronts means that Sterling will react largely to news and rumors on the Brexit negotiations. The absence of any recent progress likely means the November EU meeting will be pushed to December, so immediate tensions in currency markets abated somewhat. The GBP/EUR cross rate is taking this negativity in stride, indicating that markets are increasingly expecting an extension of the transition period rather than a hard Brexit.

EUR

The common currency continues to struggle as Italian government bonds sell off. The conflict between Brussels and the right-populist Italian government seems no closer to resolution, as the European Commission seems closer to issuing an Excessive Deficit Procedure against Italy. We expect that the key questions in the upcoming ECB meeting will revolve around the Italian budget and the apparent inability of European core inflation to rise above the 1.0% level. Until the lattter begins a convincing upward trend, it is difficult to see how rates can go up in the Eurozone.

USD

Modest weakness in retail sales data were overshadowed by the strong labor market data, where unfilled job openings rose to a new record and handily beat expectations.The minutes from the last meeting of the Federal Reserve were quite hawkish and indicate that Trump pressure will not make Fed members flinch from continued gradual rate hikes. This week’s advance third quarter GDP reading out Friday will be interesting primarily for what it says about the US trade deficit and the continued impact of fiscal stimulus.