The euro has weakened marginally against the pound during the course of this week as well as falling against the US dollar, after problems with Italian debt appear to be concerning the foreign exchange markets.
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Italy is currently at loggerheads with the European Union over its plans for Government spending levels. The European Commission has told Italy that it will need to change its plans as it violates EU rules that have been set out previously and if Italy does not back down in the next three weeks it will face financial penalties, which are yet to decided.
This has caused the single currency to fall against both the pound and the US dollar and the negative effects have also been felt in the Italian stock markets. The Italian banking sector currently owns $2.6tn worth of Government debt and bond yields have been rising recently as demand has fallen.
If the Government’s plans do not change the likelihood is that bond prices could fall even further which would increase Italian banks’ exposure to an increasing level of Italian Government debt.
During the last few days the euro has begun to slowly weaken against both the pound and the US dollar after it was revealed that the country is struggling with its deficit. Italian banks are also holding approximately €200bn worth of bad loans which is causing a real concern for investors.
The share price for one of Italy’s oldest banks has fallen by as much as 60% since the start of the year with Intesa Sanpaolo & UniCredit also having fallen by almost 30% in the same time period. Clearly this is a major concern and whilst the Government is causing problems with the EU. This could result in further problems for the Italian banking sector as confidence is likely to fall which could ultimately cause weakness for the euro.
The wider problem for the banking sector is that approximately 20% of Italy’s Government bonds are held in other countries within Europe and therefore it is crucial that things get sorted in the near future before this becomes a much larger problem. At the end of this week Standard & Poor’s will be updating their credit rating for Italian Government debt so watch this space as to how this could affect the value of the euro.
The ECB will be meeting today to discuss its latest monetary policy decision. The current expectation is that QE will be ending in January and that interest rates will begin to rise in summer.
The likelihood is that the Central Bank will announce that they will be keeping interest rates on hold for the foreseeable future, but any suggestions that they may move rates sooner than expected could cause market movement. Therefore, if you’re in the process of making a currency transfer involving euros make sure you’re well prepared for movement on GBPEUR rates later this afternoon.
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