EURUSD Rises as Italy Backs Down on Budget

EUR Analysis and Talking Points

• Increasing Signs of Eurozone Slowdown
• Budget Deficit Target Reduction

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Increasing Signs of Eurozone Slowdown

The German IFO survey dipped in-line with the recent ZEW and PMI figures, reducing hopes of a year-end rebound and instead providing increasing signs of a slowdown in the Eurozone amid the backdrop of political uncertainty (Brexit, Italy) and trade wars. Alongside this, the expectations component saw the largest drop, which in turn suggests that the slowdown is here to stay. However, the Euro has remained somewhat resilient thus far.

Budget Deficit Target Reduction

The Euro is notably firmer with Italian bond yields dipping after reports that the Italian government are discussing reducing the 2019 deficit target to 2-2.1% from the current 2.4% target. This was also followed by comments from Salvini who added that Brussels provided a positive feedback over potentially lowering its 2019 deficit target. That said, Italy’s Tria, Conte, Di Maio and Salvini are to meet at 18:30GMT in order to discuss the budget. On the back of this, the Euro has been lifted from 1.1330 to highs of 1.1380, while the Bund-BTP spreads drops below 300bps.

As a reminder, the EU had last week rejected Italy’s resubmitted budget and stated that they would press ahead with the “excessive deficit procedure”. However, if indeed the Italian government confirms it will reduce its budget deficit target then this increases the likelihood that it may be passed by the European Commission, thus providing support for the Euro as Italian bond yields drop.

EURUSD Price Chart: Daily Time Frame (July-November 2018)

Chart by IG

On the topside, resistance is situated at 1.14 handle, before 1.1450, which marks the 38.2% Fibonacci retracement of the 1.1815-1.1215 drop. Momentum indicators suggest that price action is to be relatively rangebound. On the downside, 1.13 support remains.

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX