News & analysis

Last week the single currency faced the prospect of renewed political instability in the Mediterranean like that seen in in Q2 2018.

However, unlike 2018 where EURUSD fell 7.3% following the election as a coalition was formed, the single currency barely moved.

The muted reaction in EURUSD can in part be explained by the low level in which the euro was previously trading, with European fixed income instruments taking the brunt of the action.

Further, the vote of no confidence motion is yet to be passed in Parliament before an election is called, while another layer of support was likely added by the prospect of looser fiscal policy in the event of the League forming a single party government.

Tensions have recently been simmering between the two parties over proposed tax cuts, votes on the next ECB president, and most recently a high-speed rail network between Turin and Lyon.

Salvini’s calls for a vote of no confidence will play out this week as Parliament is dragged back to Rome.

The week starts with Presidents of Senate groups meeting on Monday to set a date for the no confidence motion, before an election is pencilled in for late-August/October time.

League leader Salvini is looking to push for the no-confidence vote to be scheduled for next week in order to cash in on the recent surge in polling, while Five Star prefers for the process to begin after the August 15th national holiday. While Salvini as interior minister can summon Parliament, he cannot set the Parliamentary agenda.

Time is of the essence for whoever is set to take over control in Rome as draft budgets for 2020 are due at the European Commission as soon as mid-October.

This has been a perennial source of division between the collation parties following the last election where party mandates had to be combined. Fiscal spending limits have also created angst between Italy and the European Commission, with penalties being proposed for breaches in fiscal expenditure back in June.

On top of this, updated growth and public finance targets, which will create the framework for the 2020 budget, are expected on September 20th. With a busy political calendar over the coming months, it is unlikely that the market has heard the end of the Italy situation.


EURUSD reaction muted by historical standards to Italian political uncertainty


While headlines will focus around political developments in Italy over the coming week or so, the euro will also track the progression in data. This week German inflation is released on Tuesday morning, preliminary Q2 GDP on Wednesday, and the bloc’s trade balance data for June on Friday.