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Jane Foley, senior FX strategist at Rabobank, notes that the EUR rallied yesterday on relief at the result of the European parliamentary elections as Eurosceptics will be represented in greater numbers having taken around 25% of all MEP seats, which is well below the 33% that some polls had indicated.  

Key Quotes

“The EUR’s relief rally of yesterday, however, has failed to extend.   Eurosceptic, anti-establishment or hard right parties topped the polls in Italy, the UK, Poland and Hungary.   The EUR also remains susceptible to uncertainty about the string of changes that will be made in some of the EU’s key jobs this year.   In addition, slack growth and the threat of a step up in trade tensions between the EU and the US also threaten to undermine confidence in the EUR in the months ahead.”

“While the politics of Brussels can be expected to remain a diversion for markets for the remainder of the year, the emboldened position of Italy’s populist League in the weekend’s European parliamentary elections also has the capacity to weigh on the EUR.”

“Deputy PM Salvini has called for a “fiscal shock” of tax cuts to invigorate Italy’s flagging economy.   He plans to move ahead with a pledge to cut incomes taxes to 15% despite threats from Brussels to fine the Italian government for breaching budgetary rules.   While some commentators have argued that Salvini’s policies will marginalise Italy, the threat for the EUR is that investors will continue to view populism as a disruptive force.”

“In our view EUR/USD is likely to edge towards the 1.10 area on a 3 month with the USD likely benefitting from safe haven flows on signs of slower world growth.”