A few more tense episodes in the Italian budget drama dampened the euro’s spirits last week while the franc had a mixed run. The ECB decision might steal the forex show this week.
ECB decision and presser (Oct. 25, 11:45 am GMT)
ECB head honcho Draghi and his fellow policymakers will be back in the limelight this week as they announce their latest rate decision. Although no actual changes are expected for now, market watchers are keen to get more clues on their tightening timeline and what they think of Italy’s fiscal situation.
Recall that their previous announcement was a bit more on the hawkish side as Draghi sounded more optimistic about inflation prospects. Emphasizing this outlook could give the shared currency a much-needed lift while switching back to a more neutral tone could be a drag.
More from Italy
The credit rating downgrades are starting to trickle in early in the week, with Moody’s slashing Italy’s standing down to Baa3 or the equivalent of BBB-. S&P is due to announce theirs before the end of the week.
Also, last week’s developments indicate that the European Commission has requested for a formal explanation of Italy’s budget estimates and the government has been given until October 22 to respond.
Of course the lack of any satisfactory response, at least in the eyes of the big boys in Brussels, could further weigh on Italy’s bonds and European markets as a whole.
Last Week’s Price Review
The euro is currently the second biggest loser of the week (as of 1 pm GMT), thanks largely to concerns surrounding Italy’s budget.
The euro had a mixed and messy start but most EUR pairs began to tilt slightly to the upside after word got around that Italy was able to submit its budget to the E.U. on time.
However, sellers began to return during Tuesday’s London session after Italian PM Conte openly rejected austerity when he said the following in a speech (emphasis mine):
“Austerity is a path that can no longer be taken. It is fundamentally important for our country to reduce the growth gap with the (rest of the) EU.”
The Greenback was on the back foot at the time, though, which may have limited the euro’s losses. The euro continued to lose ground to the comdolls, however.
And when the Greenback regained its footing later, it became apparent that selling pressure on the euro was ever present since most EUR pairs slowly drifted lower, so much so that all EUR pairs were already below last week’s closing prices by the time Wednesday’s U.S. session rolled around.
And it didn’t help that there were rumors that the E.U. has already rejected Italy’s budget.
Günther H. Oettinger of the European Commission did try to dispel the rumors with the tweet below, but he also said that he personally thinks that the E.U. will very likely reject Italy’s budget, so his tweet only fueled fears that Italy’s budget will be rejected.
It is my personal opinion that based on the figures it is v likely that we have to ask Italy to correct the draft budget. I did NOT say there is a Commission decision on #Italy, nor that a letter w/ a rejection is being sent this Thursday Friday #Italien #Salvini @MarkusBecker https://t.co/GFBP6vk89H
— Günther H. Oettinger (@GOettingerEU) October 17, 2018
After that, the euro’s price action became a chaotic mess while staying below last week’s closing prices.
Sellers eventually returned during Thursday’s U.S. session after news hit the wires that the E.U. has sent an official letter to Rome since the letter concluded that Italy’s budget point to a “particularly serious non-compliance with the budgetary policy obligations laid down in the Stability and Growth Pact.”
The letter also noted that Italy’s planned budget deficit is “unprecedented in the history of the Stability and Growth Pact.”
However, the E.U. did give Italy some leeway since the letter also noted that the E.U. would allow Italy to mend it ways and negotiate “by noon on Monday 22 October 2018 … before it provides its formal Opinion.” Even so, uncertainty surrounding Italy’s budget continued to weigh on the euro.
The euro later got a final bearish kick on Friday. There was no apparent reason for that, but market analysts were still blaming Italy’s budget problem.
The euro’s price action became mixed after that, though, since the euro moved higher against everything else while losing more ground to the comdolls.
The Swiss Franc
The Swissy is turning in a mixed performance this week (as of 1 pm GMT). The Swissy is a net loser, though, so the Swissy is still headed for its sixth consecutive week of net losses.
As usual, CHF and EUR pairs had roughly similar price action. However, there was a clear divergence on Thursday since the euro suffered after the E.U. sent that warning letter to Italy, but the Swissy got a boost from that letter (except against the yen), likely because uncertainty surrounding Italy’s budget sent investors scurrying towards the safe-haven Swissy.