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Greg Gibbs, Analyst at Amplifying Global FX Capital, notes that EUR has dropped sharply in recent sessions on renewed concerns over the Italian budget.  

Key Quotes

“Typical of the market this year, event risk is hanging over the EUR.   The market is wondering if the EU will sanction Italy for breaching budget rules.   This might involve the ECB refusing to buy Italian bonds as part of its asset purchase program.”

“The uncertainty has generated another significant rise in Italian bond yields and fall in Italian bank equities.   Such developments can lead to tighter financial conditions in Italy and damage its growth and generate a cycle of negative feedback, raising the possibility of an economic crisis.”

“It remains to be seen whether EU leaders will sanction Italy.   The details of its budget are yet to be announced.   The draft budget is reported to be a deficit of 2.4% of GDP over the next three years, above the target agreement with the EU of 0.8%, and above the previous estimate given by the Italian Finance Minister Tria of 1.6%. It is due to be submitted to the EC by mid-October.”

“After the pull-back in EUR, these seem like good levels to consider buying the currency.   But the event risk may keep it volatile and difficult to trade in the near term.”