Possibility Of Anti-EU Gov. In Italy Turns Euro Bearish

Possibility Of Anti-EU Gov. In Italy Turns Euro Bearish
May 22, 2018

 
After recording the fastest growth rate of 2.5% in a decade, the Euro zone economy continues to show improvement. The ECB is expected to start winding up its asset purchase program later this year. An interest rate hike is also expected soon. However, the euro dollar has weakened in the past few days against the Pound. The UK’s strong wage and employment data is only a minor reason for the rise of the Pound against the Euro. As explained below, the Euro is driven downwards by a bearish sentiment caused by the developments in Italy. Therefore, we expect the EURGBP pair, which is currently trading at 0.8760, to decline further in the days to come.

In Italy, the right-wing Lega and the left-wing Five Star Movement (M5S) have agreed to select a mutually agreeable Presidential candidate. This has raised alarm among investors as these two parties are well known for their anti-EU stand. The two parties had even promised to conduct a referendum on the euro membership. A leaked draft of the contract between the two parties indicates a possible renegotiation of EU treaties, creation of a euro exit mechanism, reduction in Italy’s EU budget contribution, and the cancellation of Italian government debt worth €250 billion.

The financial markets are also afraid that the new government will deviate from a shoestring budget and increase debt, without giving due consideration to the EU’s fiscal rules. The possibility of having an euro-skeptic leader at the helm of Italy, the founding member of the EU, has turned the euro dollar bearish.

The currency market, however, is having a bullish view of the Pound. Analysts at Capital Economics believe the Bank of England will raise interest rates at least twice this year and two more times in 2019, following the impressive wage growth and employment data reported last week.  The UK’s employment rate rose by 0.4% to 75.6% in the recent quarter. It is the highest recorded employment rate since 1971. Furthermore, the regular pay has increased 2.9% on y-o-y basis. Therefore, economic data and anticipation of a rate hike is expected to keep the Pound bullish against the euro.

The EURGBP pair is moving along a descending channel as shown in the image below. The on-balance volume is making new lows. Therefore, we are expecting the EURGBP pair to decline in the week ahead.

EURGBP - Technical Analysis - 22nd May 2018

In the currency market, we are planning to go short in the EURGBP pair near 0.8780, with an aim to cover the position near 0.8550. To minimise risk, we would place a stop loss order above 0.8880.

Likewise, in the binary market, we may place a bet on a put option contract when the currency cross trades near 0.8780. Furthermore, we would choose a date around May 30th for the expiry of the option.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

 

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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