EUR/GBP rallies toward 0.88 as shared currency gains traction on hopes of Italian govt forming

• EUR/GBP extends daily gains in the NA session.
• Latest developments from Italy suggest that an autumn election can be avoided.  
• The data from Germany and the EU supported euro’s upside.

The political developments in Italy continue to stay as the primary focus of the FX markets for the third straight day. Earlier in the day, the shared currency started to gather strength against its rivals and allowed the EUR/GBP pair to erase a portion of its recent losses. Later in the day, the pair extended its gains and approached the critical 0.88 handle as the latest headlines from Italy revived the hopes of the country avoiding an autumn election, which is seen as a threat to euro. As of writing, the EUR/GBP was trading at 0.8772, 10 pips below its recent high, and was up 0.75% on the day.  

According to Reuters,  Italy’s 5-Star was  calling for Paolo Savona, whose candidacy put the coalition with League in  Jeopardy,   to withdraw his nomination  for economy ministry and in order to be able to form a government. Following this report, the party’s leader,  Luigi Di Maio has stated that an alternative economy minister would kick-start the renegotiations. However, Di Maio also said that they would want to keep Savona in a possible 5-star – League government in a different role.

On the other hand, today’s data from the euro area showed that the industrial confidence and economic sentiment indicator reading both surpassed the expectations in May. Meanwhile, the annual harmonized-CPI in Germany rose to 2.2% in May from 1.4% in April, providing an additional boost to the shared currency.

Technical levels to watch for

With a daily close above 0.8800 (psychological level/May 23 high), the pair could aim for 0.8835 (May 10 high) and 0.8900 (psychological level). On the flip side, supports are located at 0.8700 (daily low/psychological level/May 29 low), 0.8625 (Apr. 16 low) and 0.8600 (psychological level/May 24, 2017, low).