Euro drops on Italian populist party’s victory

Miles Eakers, Chief Market Analyst at FX and payments specialists Centtrip commented:

“The Euro has dropped 0.7% against the US Dollar, after the latest Italian exit polls suggested sweeping gains for the populist parties. The Five Star Movement won 32% of the votes – the largest number for a single party. But the big shock was the performance of the North League, which gained 17% of the votes.

“Such results, which will be confirmed later today, represent a vote against the establishment. And in the case of the North League – a vote against immigration, austerity and the European Union. The results should unnerve global investors, and the Euro will continue to weaken.

“It was not all bad news for Europe over the weekend. After a long-awaited referendum of the Social Democratic Party of Germany, Angela Merkel will keep her position as chancellor for a fourth term. As a result, the Euro strengthened for a short period until the Italian election exit polls were announced.”

John Goldie, FX Dealer at Bloomberg’s  G10 currency forecaster Argentex commented:

A hung parliament in Italy was not the surprise, but the make-up of the vote split certainly was in what was the lowest post-war general election in Italian history. The populist Five Star Movement outperformed with over 30% of the votes while central and left parties lost ground. Pre-election pacts between parties mean that the horse-trading around coalition agreements could take some time and result in a further period of political instability for a major European economy. The euro has hardly moved coming out of the weekend and throughout the Asian session, primarily as any Italian negativity was largely offset by the news earlier in the weekend that the German grand coalition could be formed, allowing for Angela Merkel to form her fourth government.

 Price action from the euro so far this morning is choppy but without definitive direction as the market digests the political goings on while also facing a busy week of fundamentals ahead. Services data across the eurozone and from the UK is released this morning but the major event comes on Thursday with the European Central Bank’s March policy meeting. Most commentators are expecting a non-event with wording and policy to remain consistent for at least another month, but recent notes from policy members have advocated an update to recent guidance. Whether that happens this month or next, you can be assured it’ll be a hawkish move when it happens and should allow for the single currency to gain across the board when it does.