background image

Euro rallies on Italy's budget hopes

Forex 6 minutes to read
John J. Hardy

Global Head of Macro Strategy

Summary:  The steepest equity rally in years in China has seen muted positive contagion around the world, at least in part as the CNY remains locked in a tight range near a perceived floor. Elsewhere, a brightening mood on Italy’s budget has boosted the euro again despite Moody’s downgrade of Italian debt on Friday. The week sees a blitz of central bank decisions.


China moved over the weekend to reassure the domestic market, as Xi Jinping offered “unwavering” rhetorical support for the private sector and the presentation of a draft of proposed tax deductions for private individuals for costs including interest on mortgages, education and health care. While Chinese equities surged strongly on the news – the largest rally in years – there was no transmission into the CNY, which remains glued to the floor in both basket and USDCNY terms. That floor is a key reason behind extremely low realised FX volatility, in our view.

Italy’s BTP yields dropped further after late Friday developments. Most importantly, the euro surged on the change of tone from the key EU Commission figure Pierre Moscovici, who expressed a desire to reduce tension with Italy. This change of tone is short on specifics, but the shift was seized on as a critical development showing that the EU has finally “blinked”.

One might argue that it is in the EU’s interest to avoid a populist surge at the EU parliamentary elections next May and wait until next year to take up the budget and deficit issue again if and when the Italian government’s deficit maths prove to have been overoptimistic. Regardless, the hopeful surge looks a bit tenuous until we see further progress, and the Italian side still says that it expects the EU to take the unprecedented step of rejecting Italy’s budget on Tuesday.  Finally on the issue, Italy’s sovereign debt was downgraded to one step above junk by Moody’s very late Friday, though the headline is not necessarily a negative catalyst given that many feared a deeper ratings cut. 

This week’s economic calendar is populated with a rash of central bank meetings. Tomorrow’s Riksbank looks pivotal for SEK due to the technical situation for EURSEK (more below) and the Riksbank’s latest guidance, though existential EU headline risks are also an important driver for the pair. Elsewhere, the Bank of Canada decision looks important as governor Poloz and company are expected to hike rates again. Two big EM central bank meetings this week are Turkey on Thursday and Russia on Friday. In Turkey, the central bank there will need to gauge whether sentiment and confidence have improved enough to signal an eventual move to cut rates. Too early to expect anything this week. 

The two things we focus on most these days for next steps are the USDCNY rate and which side of the 200-day moving average the US S&P 500 Index is trading on. That index closed precisely on that level once again on Friday.

Chart: EURCHF

EURCHF poised near the pivotal 1.1500 level on hopes that we are about to see a significant thaw in the showdown over Italy’s proposed budget. To engineer a solid surge and close above this pivotal level, we may need further concrete signs that Italy and the EU can agree on budget terms.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.