The outlook for the euro doesn’t look strong at present with Italy now set to take over from Greece as the next time bomb waiting to happen. Italy has suffered a technical recession but it is alone in the EU in doing so and carries with it the biggest debt in the EU running at more than €2 trillion. Italy should at least be comforted in the short term after credit rating agency Fitch maintained its BBB credit rating this week although any deterioration in its growth outlook could see a sharp downturn, something that could weigh heavily on the euro.
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France is also expected to see an adverse impact from the recession in Italy due to the close trade ties between the two countries. French Finance Minister Bruno le Maire has said “Don’t underestimate the impact of the Italian recession. We talk a lot about Brexit, but we don’t talk much about an Italian recession that will have a significant impact on growth in Europe and can impact France because it’s one of our most important trading partners.”
France is at least showing some signs of growth running at 0.3% in the final quarter of last year whilst Germany stagnated. France has its own problems with the gilets jaunes (yellow vests) which saw its 15th protest with demonstrations in Paris and other cities on Saturday continuing to have a negative impact on the French economy and thw wider political context in the EU.
Relations between Italy and France are already tense after France recalled its ambassador to Italy following a diplomatic row between the two countries after Italian Deputy PM Luigi Di Maio went to meet yellow vest protesters which France found provocative.
The GBPEUR exchange rate has found support over 1.15 for the pair and today's developments in British politics will likely see considerable market movement. Although the withdrawal date of 29th March is fast approaching, the pressure is on the EU and UK to reach a deal and for the moment there is some optimism that no deal will be averted.
Chief EU negotiator Michel Barnier will be meeting with PM May today to try and find a compromise over the withdrawal agreement. Michel Barnier only last week said there is a high chance of an accidental no deal Brexit highlighting how fraught these negotiations are in these final stages and how volatile rates for GBP EUR could be in these coming days.
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