The Euro is still unstable for a long time because of the Italian crisis
The representative of the ECB Ewald Nowotny said the risk of contagion, “Italian infection” at the regional bond market is minimal. Meanwhile, the yield spread of 10-year bonds of Italy-Germany has expanded to 335 basis points. Euro reacts painfully from the dayside highs in the area 1.1470 EURUSD dropped in the area 1.1420 and threatens around 1.14 after repeated unsuccessful attempts to break through the barrier of 1.15.
Now, when the dollar digests dovish message from the fed, the single currency is not as sensitive to the Italian question. But the problem with the budget is still not resolved. Brussels threatens Rome sanctions. In particular, the penalty for “disobedience” could reach 3.4 billion euros. Italy stands his ground and does not plan to amend its budget plan with the budget deficit at a dangerous level of 2.4% of GDP.
Further pressure from the EU to the third largest economy in the Eurozone will increase and does not promise Euro no good. First, the threat of further spread widening. While the reasons for panic no, but the closer the figure to around 400 basis points European assets will feel increasing pressure from investors.
Second, the political risks in the region reduce the likelihood of a rate hike by the ECB next year. So, in light of the “Italian drama” the markets do not believe that before the end of the fourth quarter of 2019, the regulator will increase the cost of lending. To assert this is not the time, but as you know, the markets live expectations, and such perspectives can still make the euros nervous.
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