Currency Review: Italian and Spanish Geopolitics Threaten Euro

“The market has taken a completely different tone, it no longer believes what the parties are saying. The markets will be really unable to move forward into a different narrative” until the Italian outlook is clearer,”

-Alessio de Longis, portfolio manager at Oppenheimer Funds Inc.,

Amidst political turmoil in Italy and Spain and increased uncertainty for the Eurozone, the Euro plummeted today, particularly against the British pound (GBP) and Japanese yen (JPY). Italian President Sergio Mattarella’s decision to veto Paolo Savona, who has been vocally critical of the euro, for the job of economy minister. In doing this, Mattarella blocked the populist coalition he promised after the general election in March which has prompted populist parties to call for new elections. In the meantime, Carlo Cottarelli, who was previously a director at the International Monetary Fund, has been appointed to run a stop-gap government. However, Cottarelli will most likely not have enough support from Parliament, so new elections will probably be held in the future.

The recent drop in EUR/GBP and EUR/JPY (Source: Yahoo Finance)

At the same time, instability has risen in Spain where Mariano Rajoy, prime minister,will face a no-confidence vote on Friday after many of Rajoy’s senior party members were convicted of corruption. The results of this vote could oust the prime minister and could replace his minority government and with the Socialist party. In both Spain and Italy, it is possible for populists to gain even more power which threatens the future strength of the euro.

The Japanese Yen struggled this weekend as it succumbed to selling pressure.The anti-risk Yen’s decreased as Trump reentered talks about a North Korean summit with Kim Jong Un increasing performance of other Asian stocks. However, the fund rallied because of its safe haven currency qualities as other markets were spooked by European geopolitical instability. JPY also received a boost from lower US treasury yields.

Meanwhile, the EUR/GBP exchange rate hit a one month low when the Euro fell by .4% as the geopolitical climate in Italy worsened. The pound sterling also had major selloffs due to the geopolitical instability in Europe and panic in the European bonds market. The close trading relationship between Great Britain and Europe led the pound to depreciate in regards to other currencies.

On May 14, the I Know First algorithm gave a bearish prediction for EUR/JPY with a signal of -8.27 and predictability of .26. In accordance with the forecast, EUR/JPY fell by 2.41%.

In the same forecast, the I Know First algorithm gave EUR/GBP a low signal of 2.4 with a predictability of .28. Because of the increased instability in Italy, EUR/GBP actually decreased by .68%.


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