EURO BACK ON OFFER AS ITALIAN BUDGET OPTIMISM DISSIPATES

A bit of optimism showed around the single currency yesterday as news began to spread that Italy was close to softening their deficit targets. This morning has seen that optimism turn towards confusion as a set of conflicting reports have indicated two totally different directions: One report earlier this morning indicated that Italy was set to cut its planned deficit target for next year and this helped to provide a temporary boost to Italian bonds. But, a little later, Italian bonds gave up gains after a report began to circulate citing Matteo Salvini that indicated Italy will not submit a revised budget to the EU.

For a bit of background: Last month saw the European Commission reject Italy’s budget as the country had planned for a 2019 budget deficit of 2.4%. The European Commission wanted to see this at no higher than 2%, driven out of worries from Italy’s already heavy debt-to-GDP ratio and the fear that a budget deficit greater than the country’s growth rate would amount to even more debt.

But the Italian government coalition was elected earlier this year on a platform of relaunching growth and development, which generally requires an initial investment of increased spending; and this put the recently-elected government at odds with the European Commission. In some ways, this was the same growth v/s austerity debate that’s played out around the Euro-Zone in a previous example around Greece. But, in other ways, this situation was far more threatening as this was coming from the third largest economy in the Euro-Zone that could bring large repercussions for future such instances.

As this theme has played out, it’s had a generalized Euro-negative effect, first showing in April and May of this year and then coming alive again in late-September as the budget clash neared. Over this period of time, EUR/USD has fallen from an April-high above 1.2400 down to fresh yearly lows just above 1.1200. Support has, thus far, held above a key Fibonacci level at 1.1212.

EUR/USD DAILY PRICE CHART: 2018 WAVES OF WEAKNESS IN THE EURO AS DRIVEN BY DYNAMICS AROUND ITALY