EUR: Italian Constitutional referendum to take place on the 4th December - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the euro is trading on a stronger footing in the near-term benefitting from heightened concerns that the UK is heading towards a “hard” Brexit and increased political uncertainty in the US which are boosting the euro’s relative appeal.

Key Quotes

“The strengthening euro is an unfavourable development for the ECB which works against their efforts to lift inflation back to their target in the medium-term. ECB President Draghi also displayed some concern yesterday that the euro-zone recovery has lost upward momentum recently reiterating that their outlook is subject to downside risks. The latest economic data has provided mixed signals over health of the euro-zone economy. The release of the IFO survey yesterday revealed that German business confidence increased to its highest levels since May 2014 shaking off initial Brexit slowdown related fears. However, it stands in contrast to the release last week of the German services PMI which declined to its lowest level in around three years.    

On monetary policy, President Draghi stressed that the ECB will preserve “very substantial” monetary support but also called on national governments to act to help boost growth through economic reforms and looser fiscal policy if there is room. His comments will provide some reassurance that the ECB is likely to extend their QE programme beyond March of next year rather than tighten policy prematurely.

There will be an increased focus on political risk in the euro-zone after the US Presidential election. Italian Prime Minister Renzi announced yesterday that he has decided to hold the Constitutional referendum on the 4th December. The decision to delay the referendum was backed by Italian President Mattarella so that it could allow the government to present the 2017 budget in mid-October and have it passed in at least one branch of parliament before the referendum. Prime Minister Renzi’s decision to tie his political future to the referendum outcome could prove to be political mistake. The latest opinion polls have signalled that his package of constitutional reforms is likely to be rejected. We continue to expect that heightened political risk in the euro-zone will weigh on the euro in the year ahead.”