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Italy has voted to reject constitutional reforms and the country’s Prime Minister, Matteo Renzi, has gone down alongside his proposals. This has thrust the Euro back into the spotlight as a busy week for European policy makers begins.
The continued fallout from the Italian population’s overwhelming ‘No’ to Renzi’s proposed streamlining of the country’s government – in order to remove the gridlock that has plagued its economy since 2008 – will remain the driving force for the currency during the early part of the week. The currency quickly declined on the news of the defeat of the reforms, posting a 20-month low against the US Dollar, although subsequently recovered as European markets opened on Monday, going on to rally to two and a half week highs in the same pairing only hours later. Concerns surrounding the health of Italy’s banks, many of which are in dire need of recapitalisation (something pushed by Renzi in his tenure), have been partially abated by swift moves made by advisors to address the process, yet the possibility of the need for nationalisation of the country’s oldest lender, Monte dei Paschi di Siena, could provide negative sentiment as the week goes on for the economic area’s single currency.
However, whilst anti-Euro elements led the charge against Renzi’s referendum, it is extremely unlikely that this will result in an exit from the single currency, as to do so the country would have to change its constitution. Sound familiar?
Meanwhile, the European Central Bank’s latest policy update on Thursday will now be even more important for the currency this week. It is widely expected that the ECB will extend its current bond-buying program, due to end in March 2017, by another six months, with the potential for a focus on the purchase of Italian government bonds in order to stabilise any economic reaction to Sunday’s referendum.
The EU remains in focus for Pound Sterling, as the second court showdown between the UK Government and a group of former fund managers regarding the legal status of the triggering of Article 50, the legislation to begin the UK’s formal negotiations to leave the EU, is heard in the Supreme Court. While the result of the second legal challenge to Brexit is not expected until January, the four day hearing of the case could provide precious soundbites from the government over the proposed negotiation tactics with EU members once Article 50 is triggered (whether that is in March 2017 or later) which so far have been closely guarded by officials. Will it remain on course for a ‘hard’ split, as was widely perceived in the immediate aftermath of the vote, or a ‘soft’ exit that has been emerging since the first court case?
Finally, during a quiet week in comparison to its peers, the US Dollar will be at the mercy of its European counterparts in a role reversal of fortunes since the Brexit vote. The Trump reflation period looks to be coming to a close whilst the US Fed December rate hike looks to be all but priced in, with the weighted Dollar Basket Index currently in a sideways two-week trading channel. However, the index is heavily weighted against the Euro meaning that a downside break (should the Euro rally continue) looks more likely. That being said, the propensity for Trump to quickly generate news headlines – whether it be on Twitter or through a misjudged phone call – means that a move in the other direction should always be expected.
Uncertainty remains King.
Key data this week (Sign up here to get our daily live macro-calendar)
UK Economic Announcements
09:30 Services PMI
Intl Economic Announcements
01:45 Caixin PMI Services (China)
05:00 Consumer Confidence (JP)
8:45-9am Services PMI (ITA, FRA, DE)
10am Retail Sales (EZ)
14:45 Services PMI (US)
15:00 ISM Services (US)
—
UK Economic Announcements
00:01 BRC Sales
Intl Economic Announcement
07:00 Factory Orders (DE)
08:30 Construction PMI (DE)
09:10 Retail PMI (DE, FRA & EZ)
10:00 GDP (EZ)
15:00 Durable Goods & Factory Orders (US)
—
UK Economic Announcements
08:30 Halifax House Price Index
09:30 Industrial Production
Intl Economic Announcements
07:00 Industrial Production (DE)
12:00 MBA Mortgage Applications (US)
15:30 Crude Oil Inventories (US)
23:50 GDP (JP)
—
UK Economic Announcements
00:01 RICS House Price Index
Intl Economic Announcements
N/A Imports/Exports (China)
12:45 ECB Monetary Policy Update
13:30 Weekly Employment Figures (US)
—
UK Economic Announcements
09:30 Construction Output
Intl Economic Announcements
13:30 Uni. Of Michigan Confidence (US)
Technicals
Technicals
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