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Analysts from Danske Bank explained that events from Italy trigger some reaction in the FX market and they expect a sharp reaction from Brussels to the M5S/League coalition agreement.

Key Quotes:

“Italian election headlines have been dominating financial markets, as there seems to have been a breakthrough in the formation of a new government. Benchmark yield spreads vis-à-vis Germany are now at higher levels than prior to the election.”

“we expect a sharp reaction from Brussels. Consequently, heightened uncertainty should be expected in the near future, until a more fiscally modest policy programme is presented from the Italian side.”

“We emphasise that there is no longer a euro exit plan in the draft proposal, which would be viewed positively by Brussels. However, according to EU, it should never have been discussed. However, the coalition still wants to renegotiate the treaties, something which is being met with scepticism by the EU.”

“Events over the past week have triggered some reaction in FX markets. Notably, we have seen EUR/CHF fall on the news flow outlined above, while EUR/DKK has been untouched by the development. Going forward, we expect FX markets to be in wait-and see mode. FX markets should remain calm as a euro exit does not form part of the coalition talks. Furthermore, as we noted above, the situation does not warrant a response from the ECB either at this stage, which could be another factor to trigger a response in the FX markets. Hence, for now, the political development will not lead us to change our FX views, but it does bear watching due to the high uncertainty surrounding the result.”