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Euro Losses on Italy Referendum Outcome May Be Fleeting

Euro Losses on Italy Referendum Outcome May Be Fleeting

Talking Points:

  • Euro selling on Italian referendum outcome may lack follow-through
  • British Pound to look past PMIs as Brexit appeal ruling looms ahead
  • US Dollar may rise if services ISM print boosts Fed rate hike outlook

The Euro underperformed in overnight trade after Italians resounding rejected a proposed constitutional change making it easier for a ruling government to remain in power in a referendum over the weekend. Prime Minister Matteo Renzi, who backed the measure, said he would resign following the loss.

The news stoked soured market-wide sentiment, with the anti-risk US Dollar and Japanese Yen trading higher while Asian stocks and S&P 500 futures fell. Financial markets are worried that Mr Renzi’s departure will usher the anti-Euro Five-Star Movement (M5S) into power.

The referendum outcome may be a blessing in disguise for markets trembling at the thought of what may happen if an administration determined to take the Eurozone’s third-largest member out of monetary union. The “no” vote likely means M5S can’t take power without forming a coalition, a move it staunchly opposes.

Near-term uncertainty may keep pressure the single currency for now but follow-through might prove challenging as the ECB rate decision looms ahead. Significant changes to the central bank’s stimulus effort are expected and traders probably won’t want to show strong directional commitment until detail emerge.

The New Zealand Dollar likewise faced selling pressure as Prime Minister John Key unexpectedly announced that he will step down from his post and opt not to contest next year’s election. The markets were caught unprepared for the announcement, triggering a knee-jerk selloff.

Looking ahead, November’s service-sector and composite UK PMI readings headline the European data docket. The outcomes may not generate a significant response from the British Pound however as traders wait for the UK Supreme Court to decide if the government needs Parliament’s approval to trigger Brexit.

The administration is appealing a High Court decision that held Prime Minister May can’t unilaterally trigger Article 50 of the Lisbon Treaty formally initiating the UK exit from the EU. Markets see a need to go through Parliament as likely to yield a “soft” rupture that keeps access to the single market vs. the “hard” alternative.

Sterling is likely to rise if the Supreme Court rules against the government and upholds the prior verdict. A decision granting the appeal will probably produce the opposite result. The decision is due by Thursday, with the UK unit likely to struggle to find lasting momentum in the interim.

Later in the day, the US ISM Non-manufacturing Composite reading enters the spotlight. A pickup in service sector activity growth is expected. A strong result in line with a recent string of upside surprises on US data outcomes may further steepen the projected Fed rate hike cycle and boost the greenback.

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Asia Session

22:30AUDAiG Perf of Services Index (NOV)51.1-50.5
23:50JPYLoans & Discounts Corp (YoY) (OCT)2.29%-2.11%
0:00AUDMelbourne Institute Inflation (MoM) (NOV)0.1%-0.2%
0:00AUDMelbourne Institute Inflation (YoY) (NOV)1.5%-1.5%
0:00NZDANZ Commodity Price (NOV)2.7%-0.7%
0:01GBPBRC Shop Price Index (YoY) (NOV)-1.7%--1.7%
0:30AUDANZ Job Advertisements (MoM) (NOV)1.7%-1.0%
0:30JPYNikkei Japan PMI Services (NOV)51.8-50.5
0:30JPYNikkei Japan PMI Composite (NOV)52.0-51.3
0:30AUDInventories SA (QoQ) (3Q)0.8%0.3%0.2%
0:30AUDCompany Operating Profit (QoQ) (3Q)1.0%3.0%6.5%
1:45CNYCaixin China PMI Services (NOV)53.1-52.4
1:45CNYCaixin China PMI Composite (NOV)52.9-52.9
5:00JPYConsumer Confidence Index (NOV)40.942.842.3

European Session

8:45EURMarkit/ADACI Italy Services PMI (NOV)51.651.0Low
8:45EURMarkit/ADACI Italy Composite PMI (NOV)51.651.1Low
8:50EURMarkit France Services PMI (NOV F)52.652.6Low
8:50EURMarkit France Composite PMI (NOV F)52.352.3Low
8:55EURMarkit Germany Services PMI (NOV F)55.055.0Medium
8:55EURMarkit/BME Germany Composite PMI (NOV F)54.954.9Medium
9:00GBPNew Car Registrations (YoY) (NOV)-1.4%Low
9:00CHFTotal Sight Deposits -527.6bLow
9:00CHFDomestic Sight Deposits -463.0bLow
9:00EURMarkit Eurozone Services PMI (NOV F)54.154.1Medium
9:00EURMarkit Eurozone Composite PMI (NOV F)54.154.1Medium
9:30GBPOfficial Reserves Changes (NOV)--$1156mLow
9:30GBPMarkit/CIPS UK Services PMI (NOV)54.054.5Medium
9:30GBPMarkit/CIPS UK Composite PMI (NOV)54.654.8Medium
9:30EUREurozone Sentix Investor Confidence (DEC)14.313.1Low
10:00EUREurozone Retail Sales (MoM) (OCT)0.8%-0.2%Medium
10:00EUREurozone Retail Sales (YoY) (OCT)1.7%1.1%Medium

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3

--- Written by Ilya Spivak, Currency Strategist for

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