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This updates a story first published on November 16

EUR price and analysis:

  • As the UK prepares for Brexit and Italy argues with the EU over its Budget, the Euro has suffered.
  • It could weaken again if there are signs that other countries are thinking of following the UK’s lead.
  • Here are some of the other nations that might decide to head for the exit door, or be ushered out of it.

More countries might want to leave the EU after Brexit

Traders in EURUSD and the Euro crosses would do well to look out for any signs that other countries are thinking of following the UK’s lead and leaving the bloc, particularly if the UK secures good Brexit terms with Brussels.

Inevitably, at the top of the list is Italy, which is currently arguing with the EU over its proposed high-spending Budget that the EU has already rejected twice. Unlike the UK, Italy is a member of the Eurozone so any move towards the exit – Italexit or Quitaly – would likely have a direct impact on the Euro, which has been weakening against the US Dollar since mid-April this year.

EURUSD Price Chart, Daily Timeframe (January 1 – November 22, 2018)

Latest EURUSD price chart.

Chart by IG

So far, the Italian coalition government – led by the populist League and the anti-establishment Five Star Movement – has been adamant that Italy will not leave either the EU or the Eurozone, with Prime Minister Giuseppe Conte telling journalists in October: “Read my lips: for Italy there is no chance of Italexit, to get out of Europe or the Eurozone.”

However, it has refused to make significant changes to its high-spending Budget and could face an “excessive deficit procedure” that would lead to financial penalties. Given it is already mired in debt, the government could yet decide that Quitaly is the lesser of two evils.

The London-based betting company William Hill is quoting odds of just 2/1 that Italy will be the next country to leave the EU and the spread – or difference in yield – between Italian and German government bonds has jumped this year to more than three percentage points on concerns about Italy’s debt burden.

Italy/Germany 10-Year Yield Spread, Daily Timeframe (January 1 – November 22, 2018)

Latest Italy Germany 10-year yield spread chart.

Source: Thomson Reuters Eikon

Which countries want to leave the EU

Elsewhere, Greece came very close to exiting the Eurozone – Grexit – in the summer of 2015, according to former French President Francois Hollande in an interview with Greek newspaper Kathimerini. Today, Greece’s debts are still high and the view that Greece might be better off outside the Eurozone has never gone away.

One risk is that Greek elections, which will be held on or before October 20, 2019, will result in a more Eurosceptic government after years of austerity and financial bailouts that have boosted Greece’s conservative opposition.

Considering which countries want to leave the EU, several others could potentially quit or be ejected, although the chances are low. Among them:

  • Poland is arguing with the EU over a controversial reform of its judiciary and in a recent poll a third of those questioned said they rejected EU membership. The risk of Polexit was acknowledged in November by European Council President Donald Tusk, a former Polish Prime Minister, who told reporters: “The matter is dramatically serious. The risk is deadly serious. Polexit is possible”.
  • Hungary is also in dispute with the EU, having been admonished by the European Parliament. Lawmakers said it was becoming an authoritarian state at the heart of Europe that encourages nationalists across the continent to follow the same path, and voted overwhelmingly in September to label Prime Minister Viktor Orbán’s government a “systemic threat to the rule of law”. Although unlikely, moves to expel it from the EU are possible.
  • In Sweden, the right-wing anti-immigration Sweden Democrats became the third-largest party in the 2018 elections, leading to political deadlock. While they will not be part of any new coalition that is formed, their advance suggests that anti-EU sentiment is rising there too, despite a survey showing Swedes are still overwhelmingly against Swexit.
  • In Estonia, the populist Eurosceptic EKRE party is gaining ground ahead of elections on March 3, 2019 and could become the third-largest party there. Once again, the chances of an exit are low but not insignificant.
  • Euroscepticism is also high in the Czech Republic and politicians have called for a Czexit referendum.

Of course, this is all a long-term rather than a near-term risk for the Euro, but the chances of another country following the UK’s lead are certainly not negligible – and a risk that traders need to keep in mind.

More to read:

Eurozone Debt Crisis: How to Trade Future Disasters

Infographic: Is the Eurozone Entering a Second Debt Crisis in 2018?

Infographic: Brexit Timeline - The Path Ahead

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--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex