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Italy’s budget troubles were still the stuff of headlines for the euro last week, preventing its buddy the franc from taking advantage of risk-off flows as well. Can this week’s catalysts change all this?

Italy’s budget updates

Last week, the head honchos in the European Commission expressed concerns about the Italian government budget as the country’s spending plans go way beyond the union’s limits.

This could keep political tension in play within the euro zone’s third largest economy as leaders of the coalition parties insist on pushing through with their campaign promises while Economy Minister Tria attempts to keep the deficit in check.

Note that the budget plan will be formally delivered on October 15, which leaves plenty of time for internal drama (Resignation, who knows?) and uncertainty.

ECB meeting minutes (Oct. 11, 11;30 am GMT)

The release of the ECB monetary policy meeting accounts (a.k.a. transcript of the central bank’s latest huddle) could briefly put the spotlight back on the region’s economic performance.

Recall that ECB Overlord Draghi was surprisingly upbeat during their actual policy announcement and presser back in September, as he highlighted the improvements in inflationary pressures. Then again, policymakers downgraded growth and inflation forecasts at that time, so the discussion might be a bit more balanced.

Last Week’s Price Review

The Euro

The euro is turning in a mixed performance (as of 1 pm GMT) this week. The euro is a net loser, though, so the euro will soon be marking its second week of net losses.

And the euro’s weakness was due largely to Italy-related concerns and the Greenback’s strength. It worth noting that the euro did try to recover on most pairs on Thursday, but buying interest was not strong enough to recover from the euro’s early losses.

Overlay of EUR Pairs: 1-Hour Forex Chart
Overlay of EUR Pairs: 1-Hour Forex Chart

The euro had a steady start but encountered broad-based selling pressure during Monday’s U.S. session, likely because of Italy-related worries since the euro began finding sellers after European Commission VP Valdis Dombrovskis said that:

“Our assessment so far from what is currently emerging is that this [Italy’s budget plan] is not compatible with the Stability and Growth Pact.”

In other words, Italy’s budget plan goes against the E.U.’s budget rules (according to Dombrovskis), which naturally made market players jittery.

And concerns surrounding Italy’s budget weighed further on the euro come Tuesday, thanks to Claudio Borghi’s comment that:

“I’m totally convinced that Italy would resolve most of its problems with its own currency.”

“Having control of one’s own means in monetary policy is a necessary condition – although not sufficient – to carry out the ambitious and enormous project of renewal.”

However, selling pressure eventually abated since Claudio Borghi later clarified that his anti-euro comment only reflects his own personal views, adding that:

“There is no plan whatsoever for leaving the euro within this government, regardless of my personal conviction.”

And more buyers would later come out to support the euro when Italian PM Giuseppe Conte said that:

“The euro is our currency and it is indispensable for us.”

“Any other statement that gives another assessment should be considered a free, arbitrary opinion that has nothing to do with the policy of the government I preside over, because it is not contemplated in the contract that is fundamental to this government experience.”

The euro then slowly climbed higher on most pairs after that before popping higher on Wednesday, thanks to a report from Corriere della Sera, which claimed that the Italian government will stick to its budget deficit target of 2.4% in 2019 but would reduce its target deficit to 2.2% in 2020 and then trim it further to 2.0% in 2021.

Follow-through buying was limited, though, and the euro even began to dip when Wednesday’s morning London session rolled around, likely because of profit-taking after a “buy the rumor, sell the news” scenario played out since more reports came out to lend credence to the Corriere della Sera report.

It’s also likely that the euro was succumbing to the Greenback’s strength at the time since the euro drifted lower against its peers. The Aussie and Kiwi were apparently more vulnerable to Greenback strength, however, since the euro continued to take ground from those two.

Anyhow, the euro would finally regain its footing on Thursday when the Greenback’s rally stalled  And it helped that ECB Member Olli Rehn said the following (emphasis mine):

“The need for extended forward guidance on monetary policy will also diminish, once inflation has reached sufficient progress towards the price stability objective.”

“As it stands, financial market expectations concerning the timing of the first interest rate rise are consistent with the Governing Council’s statements.”

And as noted in Thursday’s London session recap, that highlighted bit appears to be a hawkish hint since the market is expecting a rate hike by September 2019But the ECB’s forward guidance states that there won’t be any rate hike “at least through the summer of 2019,” which is generally considered to mean no rate hikes until the October 2019 ECB statement (at the earliest).

Anyhow, the euro continued to trend higher on most pairs after that, then steadied for some time before getting slapped lower when  Italy’s Matteo Salvini verbally lashed European Commission President Jean-Claude Juncker and Economic Affairs Commissioner Pierre Moscovici on Friday.

Fortunately for the euro, follow-through selling was limited since traders were behaving themselves ahead of the U.S. NFP report.

Speaking of the U.S. NFP report, that revealed a lower-than-expected increase in non-farm jobs, so the Greenback tumbled. And the euro was apparently one of the major beneficiaries of the Greenback’s weakness.

EUR/CAD, EUR/JPY, EUR/GBP, and EUR/USD weren’t able to climb back above last week’s closing prices (dashed, horizontal line), though, so the euro is mixed but a net loser for the week.

The Swiss Franc

The Swissy is currently in third-to-last place (as of 1 pm GMT), so the Swissy will soon be marking its fourth consecutive week of net losses.

Overlay of CHF Pairs: 1-Hour Forex ChartOverlay of CHF Pairs: 1-Hour Forex Chart
Overlay of CHF Pairs: 1-Hour Forex Chart

As usual, EUR and CHF pairs were dancing roughly in tandem this week. There was a temporary decoupling on Tuesday since the euro got whupped because of Borghi’s comments, but the Swissy actually got a lift because of those same comments.

However, the reason why the euro is faring a bit better compared to the Swissy is that Rehn’s comments on Thursday apparently gave the euro the winning edge since the euro began to outpace the Swissy after Rehn’s speech.

I also can’t help but suspect that the SNB may have been manipulating, er, I mean “intervening” in the forex market again, though, since risk aversion was the dominant sentiment on Thursday, as well as on Fridaybut most CHF pairs were either turning lower or trading sideways.

NZD/CHF (inverted, red) vs.  EUR/NZD (black): 1-Hour Forex Chart
NZD/CHF (inverted, red) vs.  EUR/NZD (black): 1-Hour Forex Chart
CHF/JPY (red) vs.  EUR/JPY (black): 1-Hour Forex Chart
CHF/JPY (red) vs.  EUR/JPY (black): 1-Hour Forex Chart
USD/CHF (inverted, red) vs.  EUR/USD (black): 1-Hour Forex Chart
USD/CHF (inverted, red) vs.  EUR/USD (black): 1-Hour Forex Chart