Hopes for Balanced Italian Coalition Party Push EUR/USD Exchange Rate Higher
The Euro to US Dollar exchange rate (EUR/USD) has risen moderately today, thanks to signs that Italy could get a new, unified government later today.
A union between the Five Star Movement and League parties was previously unpalatable, but Euro traders have since considered the benefits of a coalition.
The prime concern was that both parties could take a Eurosceptic slant in their economic policy, potentially leading to efforts to remove Italy from the EU.
Since March’s general election, however, both parties have toned down their rhetoric and become more focused on restoring the Italian economy.
Bruegel think-tank Senior Fellow Jean Pisani-Ferry has outlined the problems faced by Italy’s new leaders, saying:
‘Italy’s key priority should be to revive growth, but this cannot be accomplished by relaxing the brake on public spending.
‘The bulk of Italy’s growth problem comes from the supply side, not the demand side.
‘The country’s productivity performance is truly dismal: over the last two decades, output per employee has decreased by 0.1% per year.’
US Dollar to Euro (USD/EUR) Exchange Rate Drops as Trade War Fears Hit Home
On the other side of the pairing, the US Dollar (USD) to Euro (EUR) exchange rate has fallen due to concerns that a US-China trade war will harm the US economy.
Considering the damage that a prolonged situation of tariffs and trade measures could have on the US and China, Standard and Poor’s Beth Ann Bovino said:
‘As the US-China trade spat drags on, it’s clear that a prolonged period of iciness between the countries or an escalation of the dispute could have notable effects on the world’s two biggest economies.
‘[There is a risk of] potential job losses in certain industries – with more than 2m American workers exposed to Chinese retaliatory tariffs on the export side, according to one estimate – and it’s clear that an escalation in tensions between the two countries would have noteworthy, real-world ramifications.’
Euro to US Dollar Exchange Rate Forecast: Will EUR/USD Surge on Italian Coalition Announcement?
Looking ahead, the Euro (EUR) could rise sharply against the US Dollar (USD) this evening on an Italian political announcement.
Italian President Sergio Mattarella will be meeting with leaders of both potential coalition parties today and may approve a union shortly afterwards.
If Mr Mattarella gives the green light for a coalition to be formed, Italy’s longstanding political deadlock will be broken and the Euro could appreciate.
US Dollar movement could also be triggered by today’s events, specifically when Federal Reserve official James Bullard speaks this afternoon.
An alternate voting member on Fed interest rate decisions in 2018, Mr Bullard is considered to be a cautious, ‘dovish’ policymaker.
Mr Bullard has recently stated that no further interest rate hikes are needed at present, which goes against trader wishes for at least two more rate hikes this year.
If he reiterates this outlook then the US Dollar could fall in value, potentially extending EUR/USD exchange rate gains.