Italian spending plans and euro commitment weigh

USMCA boost short-lived

US stock markets are expected to open around half a percent lower on Tuesday, reversing much of Monday’s gains as investors quickly move on from the positive trade developments in North America.

Investors were clearly buoyed by the USMCA announcement at the start of the week, with the deal removing one of a number of economic risks for the global economy and potentially acting as a roadmap for similar negotiations with others. That positivity hasn’t lasted long though, with futures appearing to take a lead from Europe which has a number of problems of its own, aside from a trade spat with Trump.

Risk sentiment is shifting and headline-driven

Italian concerns weigh again as official suggests solution lies outside the union

European stock markets and the single currency are trading in the red on Tuesday, with Italian fiscal concerns continuing to weigh on the region. Investors have become increasingly concerned about the coalition government’s spending plans, with the deficit under the proposals being larger than many had expected and leaving Italy on a collision course with Brussels, something that shouldn’t really come as a surprise given their historic eurosceptic views and bullish campaign promises.

EURUSD Daily Chart

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Still, investors are not particularly comfortable with the path that the government has embarked on which has been reflected in the spike in Italian yields, more than 5% decline in the FTSE MIB over the last week and a decline in the single currency. Brexit may well be posing the greatest headache for euro leaders at the moment but this has the potential to cause a much greater one further down the road if it’s not managed carefully.

While the leaders of both Five Star Movement and the League have repeatedly stressed their commitment to the eurozone and EU – despite previous views that somewhat differ – this has frequently been accompanied by comments clearly intended to drum up support for the opposite and this morning’s from Claudion Borghi was no different. The League economy head claimed Italy would solve most of its problems if it had its own currency which aided further declines in the euro and Italian stocks.

EUR/USD – Italian budget crisis pulls euro lower

Sterling under pressure ahead of Tory conference

The pound is also coming under renewed pressure this morning, with yesterday’s spike proving short-lived as reports suggested that Theresa May is willing to offer further concessions on the Irish border in order to get talks moving again. This initially pushed the pound around one cent higher against the dollar but these were quickly reversed and it now finds itself back at three week lows, with traders questioning whether this is something that will get the support it needs from her own lawmakers, let alone the EU.

GBPUSD Daily Chart

The Tory annual conference has provided some interesting soundbites at the start of the week but not much more, with significant divisions clearly still existing on the vision for Brexit and how to get there. All eyes will be on Theresa May’s speech on Wednesday to see whether we get more insight on plans to bridge the divide with the EU and ensure we don’t unintentionally head for a no deal Brexit that could have significant economic consequences, not to mention political ones for the Conservative Party.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam