The euro is strengthening against all major currencies except the British pound today. The common currency is currently the strongest against the US dollar and the Japanese yen. Last week, the euro sold off in the first half of the week, and strengthened after making a bottom on Wednesday. After we signaled that EUR/USD was looking oversold (and due for a rebound), the pair ultimately moved up.
Today's significant development from the region is that Italy's Five Star Movement and the League have agreed to form a coalition government. According to the Wall Street Journal (paywall) the anti-establishment parties have agreed to a broad outline regarding a future government. Specific details regarding ministers (including the future prime minister) are expected to be announced later this week. The return of "Euroscepticism" is a significant concern for euro traders, as the new Italian government is pushing for a significant increase in government spending. Specifically, the two sides have agreed to a series of radical changes including (1) a flat tax on businesses and individuals, (2) a universal basic income program aimed at the poor, (3) lowering the national pension retirement age and (4) canceling scheduled increases in sales tax. Given Italian budget constraints, the new government is exploring the launch of a parallel currency to pay back the country's significant debts. According to the EU's financial regulations, no member of the euro currency area can operate multiple currencies simultaneously.
So far, reactions in the euro have been fairly limited. After the results of the election were published on March 4, the euro was slightly lower for a brief period of time. At the time, optimism for Eurozone growth was running fairly high. Today, the picture is looking quite different as forward-looking and actual economic data points to a significant slowdown this year. In an environment of decelerating growth, debt and deficits matter again. The latest political news from Italy is thus likely to weigh on the currency going forward. Our short-term and medium-term outlook on the euro is bearish.
EUR/USD is up slightly and trading above 1.1950. The euro is up against the yen, with EUR/JPY trading above 130.80. Finally, the euro is flat against the pound, with EUR/GBP above 0.8810.
In this week’s euro economic calendar, traders will be watching inflation and growth data. Later today, we'll hear a series of speeches from ECB speakers including Mersch, Lautenschläger, Praet, and Cœuré. Tomorrow, we’ll see Q1 figures for German and Eurozone GDP growth. We’ll also see the German ZEW sentiment survey for May, as well as Eurozone industrial production for March. On Wednesday, we’ll see the German consumer price index and the harmonized index of consumer prices for April. We’ll also see headline and core inflation for the Eurozone (April). On Friday, we’ll see the German producer price index and the wholesale price index for April. We’ll also see the Eurozone current account and trade balance for March. Last week, the ECB’s economic bulletin suggested a continuation of monetary stimulus.
As the euro weakens, we are now bearish on the currency in the medium-term. Note that the euro is currently trading within normal conditions. Our analysis is based on various technical indicators when looking at a weekly chart.