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Presidential about-turn in Italy sends Euro soaring

Today’s macro highlights:

  • GBP - Consumer Credit (April)
  • EUR - Eurozone CPI (May)
  • EUR - Eurozone Unemployment (April)
  • USD - Core PCE (April)

Presidential about-turn in Italy sends Euro soaring

A change in the political rhetoric from Rome yesterday saw the Euro post its best day of gains over the dollar since January. Markets breathed a collective sigh of relief over news that the coalition of populist parties would be given more time to form a government which the President finds acceptable, whilst they were also keen to stress that they had never sought an outright exit from the Euro. Critically, by averting another round of elections, voters aren’t being given the opportunity to galvanise that already strong anti-establishment sentiment. This move buys time for Italy and the Euro, although assuming electoral campaign promises are delivered against, a whole suite of new issues over public spending and government borrowing limits will potentially be on the cards by the end of the year. Has the can simply been kicked that bit further down the road?

It's worth noting we also saw a raft of softer than expected economic readings coming out of the US yesterday. The shortfalls were typically modest, but it’s the consistency of so many metrics coming up short that has resulted in a rare layer of dollar weakness being added to the equation.

We have a busy day ahead in terms of economic data with UK consumer credit readings for April released at 9.30am BST. The expectation here is for a marked rebound after March’s figure was hit by the snowy weather. An upbeat figure here will show that weakness in the UK consumer economy was a short-lived blip and will also strengthen the Bank of England’s hand when it comes to interest rate hikes later this year. Conversely any shortfall will have the potential to leave Sterling floundering in the near term.

Eurozone inflation and unemployment readings are both slated for 10am BST and these will both be closely followed. The direction of travel for both of these numbers will be instrumental in the ECB’s approach to concluding its asset purchase scheme. Yesterday’s German unemployment figures impressed, whilst inflation needs to keep ticking higher if the central bank is to start tightening monetary policy without stubbing out growth.

1.30pm BST this afternoon sees the release of the US Core Personal Consumption Expenditures price index, more commonly called PCE. This is important because it’s seen as the Federal Reserve’s preferred measure of inflation. After yesterday’s disappointing data, a meaningful shortfall here could start to steer markets towards expecting a more dovish Fed for the remainder of 2018, with an accompanying drag on the dollar, too. 

Sterling was dragged lower by that bout of Euro weakness we saw coming out of Italy. With that now side-lined, cable is making a recovery from those six month lows struck earlier in the week. Generally softer US economic data is also helping and with the pair having sold off so notably over the last six weeks, anything pointing towards a more hawkish outlook at the Bank of England could help drive us back to the 1.35 level that provided support for the first half of the month.

The pair added 1.2 cents yesterday but the market will be following the next steps from Italy carefully. This is carrying as much weight as the economic data right now. If Rome can maintain progress to forming a new government without the need for fresh elections and if the economic data continues to suggest the ECB will start to tighten policy, then a return towards mid-month levels around 1.18 could be feasible.

The pair lost almost a cent yesterday, although such moves are far from unusual and this one was most certainly driven by Euro strength as opposed to Pound weakness. The longer term uptrend for the pair remains in tact, but gains are hard fought. Assuming the Bank of England is still looking at an August rate hike then a return to 1.15 may follow.