Yesterday, the euro surged against most of the currencies, excluding the extremely strong yen. In particular, the EURUSD pair gained more than 50 pips to trade at 1.1450 levels. Three factors paved the way for the common currency of 19 nations: potential for a US government shutdown, increase in initial jobless claims and a budget deal between Italy and the EU.
Italy retreats from its budget standoff with the EU
On Wednesday, the populist government of the EU and Italy called a ceasefire in their bitter fight over the disputed 2019 budget of Rome, as Brussels said that the amended spending plans were in accordance with the rules of the bloc. The agreement follows a deadlock between the Italian coalition government, consisting of the right-wing Lega Party and the Five Star Movement (M5S), and the European Commission on the country’s controversial expenditure plans for 2019.
In a historic first in October, the European Commission turned down the grandiose budget of Italy, which guaranteed universal basic income and the abolition of pension reform. If implemented, these plans would have caused the Italian budget deficit in 2019 to have reached 2.4% of GDP.
While this is less than the authorized EU threshold of 3%, Brussels overruled the budget because it contradicts EU rules that states countries should work to lower their budget deficits (the earlier government of Italy had already accepted to a lower budget shortfall of 0.8%) and debt loads (Italy has the second-largest debt load in the euro region of 133% of GDP).
In the Wednesday deal, Italy accepted to reverse both of its milestone measures and is presently committed not to add EUR 2 trillion to its enormous debt pile in 2019. Italy has also agreed that its budget deficit goal should be slashed to 2.04% from the original figure of 2.4%.
Commenting on the agreement, the European Commission’s Vice President Valdis Dombrovskis said: “The Italian government has come a long way, only a few weeks ago there was confrontational rhetoric.”
This means that the Commission need not launch disciplinary measures against Italy.
Dombrovskis said: “The solution is not ideal, but it allows us to avoid an ‘Excessive Deficit Procedure’ at this stage … One important positive element is that the new budget is based on a plausible economic scenario.”
In order to arrive at a compromise, Brussels remained flexible in the budget calculation after taking into consideration “exceptional circumstances,” including the modernization of infrastructure following the unfortunate collapse of the bridge in Genoa last August.
On the economic front, the current-account surplus of the Eurozone increased in October following a drop in the preceding month. The current account surplus rose from EUR 18 billion in September to EUR 23 billion, as revealed yesterday by the European Central Bank.
In the US, President Trump supposedly considers a veto of the recently approved short-term funding bill in the Senate. Trump is thought to be displeased about the lack of funding for the US- Mexico border wall.
Trump tweeted “When I begrudgingly signed the Omnibus Bill, I was promised the Wall and Border Security by leadership. Would be done by end of year (NOW). It didn’t happen! We foolishly fight for Border Security for other countries – but not for our beloved USA. Not good!”
In the meantime, after announcing a significant decline in first-time claims for US unemployment benefits in the earlier week, the Labor Department published a report on Thursday indicating that initial jobless claims bounced back in the week ended December 15th. The report pointed out that initial unemployment claims rose to 214,000, an increase of 8,000 over the prior week’s unrevised level of 206,000. Economists anticipated jobless claims to increase to 216,000.
The economic data and political developments favor further raised the EURUSD pair.
Technically, the EURUSD pair has broken the long-term resistance at 1.1440. The next major resistance is anticipated only at 1.1570. The positive reading of the oscillator of moving average also supports the continuation of the uptrend. As a result, we can expect the EURUSD pair to move up in the short-term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
