Euro May Fall Further as Italy Clashes With EU on Budget

TALKING POINTS - EURO, SWISS FRANC, EUROPEAN UNION, ITALY, BUDGET

• Euro declining as budget talks between Italy and EU Commission approach
• Spread between German and Italian 2-year bond yields notably increasing
• Friction between Italy and EU laws likely to increase political risk in region

Italy’s economic nationalism has caused significant volatility in the Euro and regional bond markets. Italy’s recently released 2019 budget deficit target of 2.4% sent the single currency down, while the spread between German and Italian bond yields widened.

Italy is set to present its proposal to the EU Commission on October 15th. The regional bloc’s executive, is likely to reject their proposal however due to the regulations surrounding member states’ debt-to-GDP ratios and deficit limitations, all of which Italy is currently violating.

Because of Italy’s massive debt, they are required to follow a specific set of regulations known as the Excessive Deficit Procedure (EDP). This requires that they commit to a target that will bring deficits and debts back to statutory levels. If they cannot propose a fiscal plan within regulatory parameters, they face the possibility of economic sanctions.

Friction between Italy’s anti-establishment government and EU technocrats is likely to continue weighing down on the Euro. The increased political risk may cause a rise in demand for regional alternatives such as the Swiss Franc and British Pound. If broader risk aversion follows, the Yen may also rise.

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

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