The euro is strengthening against all major currencies today. The common currency is the strongest against the Japanese yen and the Canadian dollar. Yesterday, the euro weakened against most currencies (except the yen) as traders watched political developments in Italy. Note that EUR/USD continues to look oversold on a short-term time frame.
Turning to recent developments, Italy's anti-establishment coalition has agreed on many aspects of its future policies. According to a Reuters report, leaders of both parties have agreed to the future government's agenda and will present their findings to President Sergio Mattarella by Monday. The program includes plans to cut taxes, create a universal basic income program for the poor, and roll back changes to the national pension system. So far, nothing in the program includes any possible exit from the euro area.
Looking at reactions in financial markets, bond traders have been spooked by the new government's policies. 10-year Italian government bond yields have increased to 2.15% (versus 1.78% just two weeks ago). The rise in Italian bond yields suggested that investors are selling Italian bonds and rotating into perceived safe havens. German government bond yields, for example, have not increased to the same degree in the past two weeks. The spread between comparable German and Italian 10-year government bonds is currently 1.5%. Thanks to the poor outlook for Eurozone growth this year, investors are once again wary of the region's significant financial weaknesses. Our short-term and medium-term outlook on the euro is bearish.
EUR/USD is up slightly and trading above 1.180. The euro is up against the yen, with EUR/JPY trading above 131.0. Finally, the euro is up against the pound, with EUR/GBP above 0.8740.
In this week’s euro economic calendar, traders will be watching inflation and growth data. The ECB's Mersch did not address monetary policy. Lautenschläger said that the Eurozone economy was within the ECB's projections. Praet said that the Bank would remain data-dependent. Cœuré said rates are likely to remain at their present level for some time. Finally, incoming ECB member Rehn suggested that growth has cooled. YoY German Q1 GDP growth (2.3% vs. 2.4% expected) missed expectations while YoY Eurozone Q1 GDP growth (2.5%) met expectations. The German ZEW sentiment survey for May (-8.2) met expectations, while Eurozone industrial production for March (3% vs. 3.7% expected) missed expectations. The German consumer price index (1.6%) and the harmonized index of consumer prices for April (1.4%) both expectations. April headline (1.2%) and core inflation (0.7%) for the Eurozone also expectations. The German producer price index (2% vs. 1.8% expected) and the wholesale price index for April (1.4%) were both higher than expectations. The Eurozone current account (€32b vs. €35.1b expected) was smaller than expected. Later today, we'll see the Eurozone trade balance for March. Last week, the ECB’s economic bulletin suggested a continuation of monetary stimulus.
As the euro runs out of steam, we are now bearish on the currency in the short-term. Looking at various technical indicators, the currency is now looking oversold. This is based on a daily chart of the euro currency index.
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.