What’s next for Italy following the country’s general election?

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6 March 2018

thomasdodds

The Euro remained stuck around the 1.23 level against the US Dollar on Monday with the result of the weekend’s Italian election capping gains and causing investors to fret about the rise in Euroscepticism in Europe.

O
pinion polls leading up to the election again proved fairly wide of the mark, much as they did following the previous election in 2013. The two anti-establishment parties, the Five Star Movement (M5S) and the League Party, obtained a much larger share of the vote than anticipated. Luigi Di Maio’s M5S was the largest single party, obtaining 32% of the vote – a very impressive performance considering not a single opinion poll released in 2018 had given them more than a 30% share.

The result of the election has opened up the possibility that the Five Star Movement Party could potentially form a coalition government with the League, although they would need to backtrack on earlier calls that they were not willing to enter into coalition talks. The League’s leader Matteo Salvini also appears opposed to the idea, which presents a fairly significant stumbling block. Regardless it is expected to be some time before any deal is agreed and a prolonged period of negotiations lasting a number of months is very likely. A grand coalition between the ruling Democratic Party and Silvio Berlusconi’s Forza Italia is now not possible after both parties underperformed on election night.

We think the outcome of the election is just about the worst case scenario for the Euro – a long period of political uncertainty, combined with the possibility that the populist M5S, which has up until recently called for Italy to ditch the Euro and leave the European Union, could conceivably form a coalition government.

Pound jumps on May speech, tariff news weigh on NAFTA currencies

Hopes that PM Theresa May could be close to agreeing a transitional Brexit deal with the European Union supported the Pound on Monday, which rose to its highest level in three sessions against the US Dollar. The move follows comments made by May during a speech yesterday, albeit her rhetoric was very similar to comments made last week and the jump in the Pound was widely viewed as somewhat of an overreaction.

Meanwhile, the US Dollar index edged modestly lower as policy concerns continued to outweigh the generally impressive economic news we had, including a jump in the US services and non-manufacturing PMIs. Among the biggest losers during the day were the Mexican Peso and Canadian Dollar, both of which declined by over half a percent for the day. President Trump’s trade announcement last week, that will see the imposition of tariffs on imports of steel and aluminium into the US, has been seen as a potentially major blow to the future of the North American Free Trade Agreement (NAFTA).