Euro Vulnerable on Italy GDP Data, Markets Eyeing Revised Budget

TALKING POINTS – EURO, GERMAN AND ITALIAN BOND YIELDS, GDP

• EU Commission rejects budget proposal from EU member state for first time
• Italian government digging heels in as Rome and Brussels clash over budget
• German, Italian bond yields widen as fears of financial crisis start growing

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In a completely unprecedented move, the EU commission rejected the budget proposal put forth by the Italian government. The proposal included tax cuts and a guaranteed income for the unemployed, and would require raising the budget deficit by 2.4%.

After the talks with Brussels, Italian Prime Minister Giuseppe Conte affirmed his commitment to the budget plan and stated that “There isn’t any plan B”. Rome was given three weeks to revise the budget. If they fail, the Commission may have to take drastic measures.

With the second highest debt-to-GDP ratio in the EU – 131% – many investors and policy makers believe the proposed fiscal program is not one the Italian government can afford. Fears of a potential regional financial crisis have begun to loom over investors. This has caused the spread between German and Italian bond yields to widen to their highest point in five years.

Next week, Italy’s GDP is scheduled to be released at 09:00 GMT on October 30. According to the forecast set forth by the EU Commission, real GDP is expected to increase 1.3% before easing down to 1.1% in 2019.

The ambitious fiscal program combined with the low forecasts for growth is likely to exert downward pressure on the Euro and widen the spread between German and Italian bond yields. This is likely coming from a concern on how the government will fund its bold spending program with unsustainably low growth.

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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