There’s never a dull moment in Italian politics
It’s almost traditional for Italian politics to become a complete mess and this situation is no different. There’s been lots of discussions in our live trading room on the subject so this post is an attempt to try and clarify what’s going on.
EU exit fears
This is what’s gripping the markets right now. It’s the fear that Italy might make noises or moves to leave the euro. The market might be going a little too far in that expectation. 5 Star’s Di Maio has come out today and said that an exit is not something on the agenda. But, that also follows comments both yesterday and today from League’s Salvini that leaving the euro hasn’t been contemplated by either his party or 5 Star, and that all the conditions in the coalition agreement were about discussing some European rules. Yesterday, in an ANSA article, he even said that quitting the euro wasn’t in their programme, nor in Savona’s programme.
When you read all that, you’ve got to wonder why the market is getting its knickers in a twist?
Italy is just one piece of the pie
With the Spanish confidence vote headlines last week, and France’s Le Pen saying she’ll be up for running in the 2022 elections, the market is seeing another potential jump in populism. It’s another negative in the same vein as Italy and all adds to the mix.
What happens now in Italy?
The millions lira question ?
This still very much points to an in-house political fight between the president and the coalition parties, rather than fighting over policy. There was always going to be EU exit fears, no matter what the two parties said but the president putting the block on Savona’s appointment has put the cat among the pigeons. It’s brought talk of impeachment of the president and heated comments from Savona, who (if rumours are to be believed), told people that they needs to push the GERITA spread out to 800bp to show the German’s “we’re not kidding”. This prompted a response from Bank of Italy’s Visco saying that Savona has anti-German ideas that would be suicidal to Italy. It’s created a division between the coalition and the president with both now fighting their corners.
New elections look likely now and there’s an important factor to watch. The League’s popularity has increased (if the polls are correct), and if other parties like PD or Forza also pick up voters, that could see League looking to enter a coaltion with those rather than 5 Star Both parties are more pro-Europe and that would be big news and a big driver of an EUR rally.
It’s still all conjecture and there’s endless possibilities so no doubt we’ll see many more twists and turns to come.
For now, we might have seen the fear reach a crescendo today in EUR markets, and we’ll spend sometime going sideways or slowly climbing higher. Even with Di Maio’s comments today, the bounce in EUR has been minimal so the market is showing it’s not quite ready to believe or give up this bone just now. I think the exit talk is still overblown so I’m a potential scalp dip buyer unles we get more bad news. Keep an eye on those bond yields and spreads as it’s a good insight to the current market sentiment. Be on guard for any further talk pushing Italy away from an exit as that will bring risk back on but also watch in case such talk doesn’t, as that will suggest there’s more in the market’s mind than this.
From here, EURUSD needs to the lows to hold to cement a bottom and resistance sits now at 1.1575/80, 1.1600, 1.1620 & 1.1640. The main support is still down around the 1.1450 area. I spoke to the guys at Core TV earlier about the levels I’m now watching, and funnily enough, warned about the risk of the positive EU comments just before the Di Maio headlines hit.
I’d like to finish this post with a big thank you to our Italian reader and trader 5 Magic’s. It’s often very hard as an outsider to understand what’s going on at street level and he’s had his finger on the pulse in all aspects of this Italian news. His insight is first class and it’s has been a great benefit to helping us, the ForexFlow traders, understand exactly what’s been going on so we can trade accordingly.