The euro is under pressure on Monday as Italian politics and concerns over the health of the German economy take centre stage.
Italian politics are back under the spotlight as Deputy Prime Minister Matteo Salvini called for a snap general election citing differences between the coalition partners as irreparable. Right wing Mr Salvini is ahead in the polls largely thanks to his anti-immigration and “man of people position”, pushing for tax cuts despite Italy’s mounting tax pile. Whilst Salvini’s pledge for tax cuts is making him popular with the Italian electorate, the same cannot be said among euro traders. Any sign that Italy is willing to let its debt pile grow further out of control could be bad news for the euro.
Gloomy data last week from Germany, fuelled concerns that eurozone’s largest economy is heading for a recession. Industrial production dropped by a more than expected -1.5% month on month in June. Annually, industrial production declined at the fastest pace in almost a decade. Meanwhile German exports slumped 8% yoy in June. The dismal data underscores the struggles that the German manufacturing sector is facing as global trade tensions escalate. Attention will turn squarely to German Q2 GDP data on Wednesday, which is expected to show a contraction.
Signs of a slowing German economy could increase investor expectations for the ECB to adopt a more dovish monetary policy in a bid to tackle the slowdown.
Strengthening pound could be short lived
The pound is having a rare up day at the start of the week after dipping to 10-year lows versus the euro overnight. No deal Brexit fears combined with the UK unexpectedly slipping into contraction in the second quarter. Ongoing Brexit uncertainty and a slowing global economy are clearly taking their toll on the UK economy dragging the pound lower. However, the pound was finding some relief from Brexit news flow on Monday. MP’s may well be on summer recess but that is not preventing them for exploring ways to prevent a no deal Brexit. A vote of no confidence by the opposition party or Parliament forcing an extension to Article 50 are two potential options for avoiding a no deal Brexit. However, the bottom line is that pro-Remainers are running short of options. Therefore, any move higher in the pound could be short lived.
EUR/GBP Levels to watch:
EUR/GBP moves lower after surpassing 0.9300 overnight, its lowest level in 10 years. The pair is down over 0.5% on the day. Immediate support can be seen at 0.9250. A break through here could open the doors to 0.9089 prior to 0.9050. On the upside resistance can be seen at 0.9324 before the pair targets 0.94.