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TALKING POINTS – EURO, EU, BREXIT, ITALY BUDGET

  • European Council meeting scheduled to take place December 13 - 14
  • Topics of discussion will include: Brexit, Italy budget, foreign affairs
  • Investors will be eyeing the Euro and any key policy announcements

Just started trading Euro? Check out our beginners’ FX markets guide!

EUROPEAN COUNCIL AGENDA

European Union leaders will be convening at an EU Council meeting from December 13-14th to discuss pressing domestic and international issues. The region bloc has recently been struggling with political fragmentation that spells out potential trouble ahead of the 2019 EU parliamentary elections in the spring.

Some of the items on the agenda include structuring the 2021-2027 Multinational Financial Framework, finding a comprehensive approach to migration and “in light of recent events… other specific foreign policy issues”. Some of the more hot-button issues to be discussed will likely include Brexit, the Italian budget talks, trade wars and the 2019 outlook for growth.

KEY DEVELOPMENTS IN HOT-BUTTON ISSUES TO BE DISCUSSED

On Monday, Prime Minister Theresa May called off a vote on her Brexit deal amid fears that it would not pass through parliament. The PM has not stated when the next vote will be held but the absolute latest will be on January 21st. The decision sent Pound Sterling lower against the Euro and all its major counterparts.

EUR/GBP After May’s Announcement

EUR/GBP - Daily Chart

On Wednesday, Italian Prime Minister Guiseppe Conte is reportedly meeting with the President of the EU Commission Jean-Claude Junker to negotiate Italy’s 2019 budget in an attempt to avoid punitive measurements for violating EU fiscal laws.

The situation in France has also thrown a wrench into the budget talks. The EU has been demanding Italy reduce its proposed 2.4% budget deficit to at least 1.9%. Meanwhile, French President Emmanuel Macron’s proposed budgetary changes will push France’s budget deficit – as a percent of GDP – to be around 3.5%. This crosses the EU’s threshold of 3.0%.

MARKET OULOOK – EURO, EUROPEAN BOND YIELDS

Investors during this time will likely be closely watching the Euro and be on the lookout for key comments from officials indicating possible directions policymakers are heading toward. As a result, the Euro may be more volatile in the coming days along with other European-denominated assets such as the Swiss Franc and Pound Sterling.

The spread between Italian and German 10-year bond yields has increased over 170% since May, indicating a greater reluctance to lend to Rome versus Berlin. However, since late November, the spread has been narrowing. This may be signaling a shift in investor’s outlook on EU-Italy budget negotiations.

Italian and German 10-Year Bond Yield Spread

Italian German 10-Year Bond Yield Spread - Daily Chart

This comes amid internal political fracturing and shifting views of Italians who are appearing to prefer an EU-friendly budget according to several polls conducted in late November. However, it is unlikely Deputy PM Matteo Salvini will back down, given that his popularity has emerged from standing up to Brussels as an anti-establishment politician. For him, compromise is capitulation. His resolve may continue to undermine the Euro, a currency which fundamentally relies on a sense of European unity, not defiance.

EURO TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter