It looks like the euro could be in for a fairly rocky start to the month, with a pickup in Brexit talks loosening the single currency’s grip over the pound. Cracks within the bloc’s financial sector continue to choke investor confidence and draw the European Central Bank’s credibility into question.
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Yesterday, three ECB policymakers downplayed the weak projections we have seen coming out of the EU recently, and confirmed that their plans for winding down monetary stimulus remain on track. Incidentally, inflation levels came out stronger than expected, rising to 1.1%, seemingly justifying their positivity.
However, the markets did not bite and the EUR GBP exchange rate fell consistently over the course of the afternoon. Yesterday’s vote from EU diplomats may have played a key role in this. The decision to loosen expectations on European banks' cash reserves and help EU members resolve their debt crisis did little to draw investor confidence.
Ever since Italy’s banking crisis has been brought back into the spotlight, investors may have been looking out for the EU to implement more regulation and improve lending standards across all members to crack down on bad lending. Unfortunately, by seemingly doing the opposite there is an argument to suggest that the markets will begin to lose faith in the single currency. This would make the move back towards the 1.10 mark far less likely.
With European banking stress test results due to be released towards the end of this week, those looking to buy the euro in the short term may well be provided with big swings to capitalise on over the next couple of days.
Given the fact that Bank of Italy Governor Ignazio Visco called for yet more fiscal stability from the Italian Government due to rising borrowing costs, the signs are all pointing to potential volatility.
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