Euro Rallies as Italy Backtracks on Deficit Spending

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Market Drivers November 26, 2018
Italian government looking to reduce the deficit to 2.0%
IFO mixed but steady
Nikkei 0.76% Dax 1.28%
Oil $51/bbl
Gold $1226/oz.
Bitcoin $4000

Europe and Asia:
EUR IFO 98.7 vs. 99.2

North America:
No Data

Euro got a boost in early European dealing today after reports that Italy may be willing to curb its fiscal deficit targets to 2.0-2.1% rates from earlier stance of expanding the deficit to 2.4% level.

Italian leader Silvio Di Maio did not dispute the reports, lending further credibility to the rally, but at the same time minimized the focus on the number, noting that he was more interested in making sure that fiscal policy would be stimulative next year. Still, the sudden about-face by Italian leadership clearly signals that a standoff between Brussels and Rome may be averted. Spooked by the widening of Italian bond yield spreads that could endanger the solvency of the whole Italian banking system, Mr. Di Maio and company have decided to walk back their rebellious rhetoric and appear to be in the process of working out a compromise with EU.

The easing of tensions on the Italian budget spurred a relief rally in EURUSD with the pair rising to 1.1380 by mid-morning European trade. The political standoff was a major drag on the pair for the past two months, and if the situation could be resolved amicably, the shorts may be squeezed all the way to 1.1500 on relief flows over the next several days.

On the economic front, the IFO data came in mixed but steady with expectations printing at 98.7 vs. 99.2 but current conditions coming in at 105.4 vs. 105.3. Speaking about the data Klaus Wohlrabe, the IFO economist noted that there are increasing signs of a possible German economic turnaround, though conditions remain muted due to Brexit and trade conflict concerns.

In any case, the news tonight was a welcome ray of sunshine for euro longs and may have set the stage for near-term bottom at the 1.1300 level. If the anti-dollar flows persist into the North American session, which is empty of any economic data today, the pair could make a run towards the 1.1400 figure, as long as headlines from Rome and Brussels remain supportive.

Boris Schlossberg
Managing Director

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