Euro to US Dollar Exchange Rate Slumps to Fresh Lows as Italian Political Fears Worsen
Despite finding key support levels near lows of 1.16 last week, the Euro to US Dollar (EUR/USD) exchange rate has failed to hold its ground since markets opened on Monday. Instead, concerns about Italian politics saw the pair crash to new lows.
Last week, broad weakness in the Euro caused EUR/USD to slip from 1.1772 to 1.1659 despite a selloff in the US Dollar. On Tuesday, EUR/USD fell again and hit a low of 1.1581 – the pair’s worst level since July 2017.
Over the weekend, Italy’s President Sergio Mattarella rejected the nomination of the Eurosceptic, Paolo Savona as the next finance minister.
As a result, the League and 5-Star Movement’s attempts at forming a government have collapsed and President Matterella named Carlo Cottarelli as the nation’s temporary Prime Minister instead.
This has worsened Eurozone uncertainty and left the Euro (EUR) unappealing.
Euro (EUR) Exchange Rates Slump on Broad Italian Uncertainties
With markets now expecting fresh Italian elections within the next year, Euro uncertainty has significantly worsened again.
Some politicians and analysts are already calling Italy’s next set of elections a referendum on the Eurozone.
This has echoed the uncertainties and fears of a populist revolt seen in the run up to and following 2016’s Brexit vote in the UK.
Following the perceived likelihood of an upcoming election in Italy, market bets on the possibility of an ‘Italexit’ (an Italian exit from the Eurozone) jumped from just 3.6% to 11.3%.
According to Kit Juckes from Societe Generale:
‘The threat of further rating downgrades hangs over the BTP [Italian bond] market (and is largely priced-in), and the European Central Bank’s plans for providing forward guidance on policy normalisation are up in the air. Which means that the risk of EUR/USD reaching 1.10 by the end of the summer is significantly higher than the possibility of a recovery to 1.20.’
Recent Eurozone data has continued to indicate that the bloc’s economy is slowing at a quicker pace than expected, which has limited the Euro’s support from ecostats.
US Dollar (USD) Exchange Rates Strengthen on Fresh Diplomatic Hopes
Following last week’s news that US President Donald Trump had called off a summit between the US and North Korea, the US Dollar briefly slumped.
However, since then, investors have become hopeful that the prospects of a meeting between the nations could be salvaged.
Efforts from top US, South Korean and North Korean diplomats to try and make sure a US-NK summit is still held have made the US Dollar (USD) more appealing again.
On Tuesday, one of North Korea’s highest ranking officials reportedly headed to the US as part of preparations for a new summit between the nations.
Last week’s US data was relatively underwhelming, which has limited US Dollar demand.
US durable goods orders results came in short of expectations in April, and the Federal Reserve’s latest meeting minutes results took a more cautious tone than investors had expected.
Euro to US Dollar (EUR/USD) Forecast: Italian Politics and Inflation in Focus
The Euro is likely to be the primary driver of Euro to US Dollar (EUR/USD) exchange rate movement this week, with investors refocusing on Eurozone politics and a slew of influential Eurozone ecostats due for publication over the coming days.
Of course, any signs that a new Italian government could remain in place and that further elections could be avoided are likely to ease political fears and make the Euro more appealing again.
However, investors perceive that an election is becoming increasingly likely, with League party leader Matteo Salvini saying it will be a ‘real and true referendum’.
As a result, market anxiety over the Euro may only get worse in the coming week. The Euro to US Dollar (EUR/USD) exchange rate could continue to slump.
Wednesday will see the publication of notable Eurozone ecostats, including German retail, unemployment and inflation figures. Thursday will follow with inflation figures from France and the Eurozone overall.
Of course, political news regarding US-North Korea diplomacy could drive the US Dollar, but the US currency is also likely to be influenced by growth projections on Wednesday and PCE index data on Thursday.