The euro faces a volatile period ahead, with uncertainty now hanging over the Italian budget that has been proposed by the governing Five Star and Lega coalition. The ruling Government has recently warned of a global financial disaster if the EU rejects its proposed budget plans and applies pressure to follow the EU’s rules. The economics chief for the Lega party has stated “If anybody in Brussels is stupid enough to think they can use the Greek text book against us, they will find that the crisis is not Greece squared, but Greece cubed.”
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Italian Government borrowing costs have now jumped to a four year high after the EU reiterated its concerns over the level of spending in the budget, this is leading to uncertainty for the Italian banking system. The problem for Italy is that Italian debt is riding at €2.3 trillion, so any developments which cause investors to shy away from Italy could cause problems for the EU and the single currency.
European Central Bank President Mario Draghi has expressed his own concerns and has reportedly set up an emergency meeting with the Italian President Sergio Mattarella which is expected to take place tomorrow.
Mario Draghi will be keen to try and avoid the triggering of another credit crunch and any contagion spreading. As a sign of things to come Italy have warned Brussels against interfering in the budget plans and panicking the bond markets to try and force Italy to comply.
We could now see a downgrade in ratings from the credit rating agencies, which could pile pressure on euro exchange rates. A big battle between the EU and Italy is developing which could result in considerable euro weakness.
Economic data from the EU is lighter this week with just a small handful of releases. Investor confidence released yesterday arrived weaker than expected, suggesting that there are concerns amongst the business sector which could prove euro negative. German trade balance data is released this morning and could help to signal how strong the engine room of the EU is performing.
Those clients looking to sell euros to buy pounds continue to see a good opportunity, although any further positive developments on Brexit for a potential deal is likely to see the pound rally higher. With so much happening in these markets it may be worth considering taking the risk out of your transfer and securing funds ahead of any political developments this week.
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