Euro rallies but Italy remains a potential flashpoint

Clare MacCarthy

Senior Editor, Saxo Bank

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The fireworks and fear that lashed markets over the Italian political crisis have ebbed overnight and the euro has staged a strong comeback, especially against the US dollar. However, Italy still does not have a government and though the populist/anti-EU parties have apparently renewed their attempt to form an administration, the imposition of a technocrat prime minister (and consequently, another election) remains a possibility. We may get the answer to all that today.

"The market action is suggesting in a lot of ways that risk from the Italian situation, in tactical terms, seems to be fading. We saw a pretty decent rebound in the euro and a decent improvement in credit spreads for Italy, and across markets we saw a recovery in risk appetite," says John J Hardy, Saxo’s Head of Forex Strategy. 

Besides the easing of Italian fears, which has boosted the euro, the US dollar is labouring under the latest FOMC minutes and the implication that the Fed may reconsider its pace of monetary policy tightening. 

Elsewhere, a relief rally was also apparent in equities, both in Asia overnight and in Europe when the morning session opened. In commodities, Brent crude oil has retraced half of its recent sharp losses, helped by dollar weakness and a new belief that an output increase by Russia/Opec would only stabilise the price, not send it lower.

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