Last week the EU rejected the Italian budget, the first time it has rejected a member state proposal, so the drafting process once again begins in Italy. The proposal from the Italian Government would have kept the country's borrowing to 2.4% of GDP which is inside the EU’s rules of 3%, however it would have seen their deficit rise to 130% of GDP, only just behind Greece.
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The battle with the EU will no doubt continue, but the Italian Government are coming under some pressure domestically as some argue that the initial budget offering wasn’t tough enough. They will no doubt have to taper some of their spending plans which involve reducing tax and implementing a comprehensive state support system.
Evidently some of the commitments from the Government don't seem achievable. The euro is likely to be under pressure whilst talks continue however it’s difficult to see how a resolution won't eventually be found. Whilst Italy may want to rebel for the time being, they’re still bound by existing agreements and only by leaving the EU would they be free to do as they please. The moment there is a solution between Italy and the EU I would expect the GBP/EUR rate to drop even closer to the 1.10 level.
This week is a busy week for data from the Eurozone, with the Gross Domestic Product figure on Tuesday which is expected to show a 0.2% drop to 1.9%. This is a slight concern for the EU, and should the data come below the expectation then the euro may see an immediate drop.
On Wednesday we will see the latest Consumer Price Index data which is forecast for a slight improvement of 0.1% to 2.2%. Last week, during his latest statement following the ECB’s interest rate decision, Mario Draghi suggested that a rate hike was still expected after Summer next year and inflation will be a key factor in this.
Assuming the expected results are achieved, the euro could potentially further strengthen this week. I would argue that the GBP/EUR rate could have another tough week, potentially returning to the 1.11’s for the first time in a month. Make sure you’re speaking with your account manager in order to plan when might be a suitable time for you to complete a trade.
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