Monex: Fall in Italian political risks eases pressure on euro

February 9, 2021

This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe.

EUR

The euro sustained losses against most of the G10 currency board in yesterday’s session, apart from USD and SEK. While the broad risk environment was boosted by the downturn in the dollar, ECB President Christine Lagarde’s speech to the European Parliament yesterday likely weighed on the single currency due to the emphasis she placed on the downside risks to the economic outlook. Lagarde stated the mutations in the virus and curbs meant to contain the pandemic pose big downside risks for growth and coordinated fiscal and monetary support is crucial to limit these downside risks. On the Italian front, former ECB chief Mario Draghi told lawmakers he wants to make a common euro-area budget a priority if he becomes Italy’s new prime minister. This should not come as a surprise to markets as Draghi already called for euro nations to forge a common budget when he was ECB President. Draghi is set to conclude a second round of talks with parties today while he could reveal his top ministers this week.

USD

Despite opening the week on the front foot, the US dollar’s fortunes turned around in the afternoon of yesterday’s European session to post losses against most of the G10 with the exception of SEK. The dollar began the session on the front foot, as stimulus talks by the Biden administration signalled a larger package for markets via the reconciliation process. This led to a significant bear steepening of the US yield curve, while also raising inflation expectations as breakeven rates on the 10-year rose to the highest point since 2014. However, the opening of the US equity market saw positive risk sentiment flow around markets in general, with precious metals and oil also rallying. Ultimately, this weighed on the greenback despite it being a driver of USD outperformance earlier in the day. The market focus remains on the progression of the fiscal stimulus package in Washington, despite Donald Trump’s Senate hearing set to begin today. Late last night, House Democrats released their biggest piece of coronavirus relief, extending the $400 unemployment checks until August 29th while sending $1,400 direct cheques to individuals with incomes up to $75,000 and couples with joint incomes up to $150,000. The House Ways and Means Committee votes start today, with a full vote expected the week of February 22nd. The signal sent by the Biden administration of a large Covid-19 relief package resulted in Goldman Sachs upgrading their estimates of US stimulus this year from $1.1trn to $1.5trn, an upgrade that was mimicked in market pricing of US yields earlier in the day.

GBP

Yesterday’s trading session saw sterling tumble vs USD and EUR before recovering losses during the later part of the trading session, as both Brexit and virus headlines were in the picture for the pound yesterday. Reuters reported that Britain called on Monday for a reset in relations with the EU and a refinement of a Brexit deal covering trade with Northern Ireland as “trust was eroded when Brussels attempted to restrict Covid-19 vaccine supplies”. Britain also asked for a two-year extension on the Northern Ireland border issue but Brussels is unlikely to accept this call, according to the Telegraph. Adding to the narratives weighing on sterling is the downward revision of growth in 2021 by the UK’s National Institute of Economic and Social Research, which cut the growth forecast from 5.9% to 3.4% for the coming year. The forecasts reflect high levels of uncertainty about economic recovery as the virus path and efficacy of vaccines against all variants is not a given yet, potentially casting doubt upon the Bank of England’s economic rebound hopes. Nevertheless, cable is still trading around three-year highs as the rapid vaccine rollout in the UK and faded expectations of negative rates keep the pound supported.