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Euro Gains Sharply On Soothing Italian Budget Report, Reaction Eyed

Euro Gains Sharply On Soothing Italian Budget Report, Reaction Eyed

David Cottle, Analyst

Euro, Italian Budget Report Talking Points:

  • The Euro gained on news of possible Italian budgetary restraint
  • After weeks of doubt it seems Rome is still intent on deficit reduction
  • However, the domestic political reaction remains to be seen

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The Euro got an unusual boost in Asia Pacific trading hours Wednesday on reports that Italy plans to cut its budget deficit.

Worries about increased spending from the country’s new euroskeptic government have weighed on the currency in the past few weeks, and seen Italian bond yields head sharply higher.

Some political leaders have even suggested, once again, that leaving the Euro would solve a lot of Italy’s financial problems However, a piece in the Corriere della Sera daily citing a Cabinet meeting said that a draft plan proposes cutting the deficit to 2% of Gross Domestic Product in 2021. The government forecasts a deficit of 2.4% in 2019 and 2.2% in 2020.

The deficit reductions were prioritized under pressure from the European Union, the report says, with spending cuts to come, so Italian political reaction in the next few days may well be worth watching for Euro investors. It's not clear that many will feel that EU-mandated austerity was what they voted for in the March general election. However, for now the markets are seeing the report as positive for the single currency.

Sharp Spike: Euro Vs US Dollar, 5-Minute Chart

On its broader, daily chat, EUR/USD remains very much on the defensive, and it makes a lot of sense that this should be so. The US Federal Reserve is much further along the road of post-crisis monetary-policy normalization than the European Central Bank, the latter having to juggle the apparently divergent interest rate needs of disparate EU economies.

Still Biased Lower; Euro Vs US Dollar, Daily Chart

Indeed EUR/USD still looks close to a downside range break for all its Wednesday vigor. If seen, focus will then be on mid-August’s lows around 1.1315

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--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

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