The Strategist

The euro is losing ground thanks to the Italian political crisis

05/30/2018 - 14:33

The euro exchange rate in the world market has updated the eleven-month minimum, having fallen to a level of $ 1.15. The European currency has significantly lost positions against the background of the new political crisis in Italy, which could limit the ECB's ability to tighten monetary and credit policy in the near future.

The European currency continues to lose its positions in the world market. On Tuesday, the euro for the first time since July 2017 approached the level of $ 1.15. In the course of trading, it reached $ 1,1506, which is 1% below the previous day's close. The yen's rate against the euro rose by 1.3%, to ¥ 125.5, the maximum since June 27, 2017. Other leading currencies went up against the euro - the Swiss franc by 0.9%, the Canadian dollar by 0.8%. Over the six weeks of almost continuous decline, the European currency has fallen in price against other currencies by 4-6%, and only in the last week it lost 1.6-4%.

The weakening of the euro is taking place against the background of an acute political crisis in Italy. Last weekend, President Sergio Mattarella refused to approve composition of the coalition "government of change", which was presented by Giuseppe Conte, nominated to the post of Prime Minister by the Northern league and the Five Star Movement parties. The head of state decided to create a technical transition cabinet, which many leading Italian politicians regarded as exceeding the constitutional powers. In response, the parties suspended from forming the government proposed impeachment to President, and also declared their readiness to hold new parliamentary elections if necessary.

In such circumstances, the international rating agency Moody `s announced its decision to review Italy’s Baa2 long - term with a possible downgrade. Analysts of the agency explained their decision with the increased risks of deteriorating the state budget against the backdrop of plans of the new coalition government of Italy. In addition, in their opinion, there are risks that structural reforms will be stalled, and past achievements, including updating the pension system from 2011, will be eliminated. As a result, the Italian stock index FTSE MIB has fallen off almost 5% since the beginning of the week, and the yield of 10-year Eurobonds rose for the first time since October 2014 above the level of 3% per annum (a week ago it was 1.8% per annum). These events caused a slight panic on world markets and led to a decrease in the likelihood of monetary tightening of the ECB, which also gives players a negative signal for the euro.