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Italy Enters a Technical Recession, EUR/USD Recovery Halted

Italy Enters a Technical Recession, EUR/USD Recovery Halted

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EUR Analysis and Talking Points

  • Italy confirms it is in a technical recession
  • Italy’s contracting economy could re-open the budget crisis with the EU

For more in-depth analysis on EUR, read the brand new Q1 2019 FX forecast guides

Italy confirms it is in a Technical Recession

The Italian economy contracts for a second quarter in a row which means it has entered a technical recession, stalling the recent EUR/USD rally. The monthly figure was hinted by Italian president Giuseppe Conte yesterday, a day before the official release, as he mentioned that the Italian economy had probably shrunk in the fourth quarter. The quarterly rate, a fall of 0.2% (Exp. -0.1%) is not a big surprise, following Italy’s budget crisis with the EU in October and the notion that growth is slowing in many economies around the world. Continuing weaker-than-expected economic data being released by Germany, coupled with France’s private sector slowdown in the month of December, hinted that the Eurozone was likely to experience a slowdown in growth in the last quarter of 2018, which is confirmed by the Eurozone GDP figure announced today, a growth of just 0.2% (Exp. 0.2%). After the announcement, EUR/USD was trading marginally lower halting its recent rally and hovering just below the 1.15 handle.

Italy’s contracting economy could re-open the budget crisis with the EU

One of the likely implications of Italy’s contracting economy is that it could re-open the budget dispute between Italy and the EU, whereby the latter may demand Italy to lower its already revised deficit budget of 2.04 per cent of GDP (down from 2.4) which may in turn lead to further increases in the spread between the Italian 10-year bond yield and the German Bund, which act as a benchmark for sovereign risk in the Eurozone.

IG Client SentimentCurrent sentiment shows clients are net short 54% on EUR/USD, as such contrarian indicator signals remain bullish.

Recommended Reading

Eurozone Debt Crisis: How to Trade Future Disasters – Martin Essex, MSTA, Analyst and Editor

EURUSD PRICE CHART: 1 minute Time-Frame (Intraday)

Chart by IG


--- Written by Daniela Sabin Hathorn, Junior Analyst

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.