US Dollar May Rise Against Euro as Italian Political Risk Mounts

EURO, SWISS FRANC, US DOLLAR, ITALIAN POLITICS – TALKING POINTS

• The US Dollar and Swiss Franc may gain on risk aversion from Italy political threat

• Deputy PM Matteo Salvini may challenge Giuseppe Conte via vote of no confidence

• Rome-Brussels budget dispute may resurface, pressuring Euro, Italy sovereign debt

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EURUSD and EURCHF may fall if volatile Italian politics spook markets and compel traders to redirect capital into anti-risk assets like USD or CHF. Deputy Prime Minister Matteo Salvini of the Lega Nord party intends on challenging the current PM Giuseppe Conte through a vote of no confidence. If he succeeds, Salvini will have an opportunity to break away from the conflict-prone coalition government and consolidate power.

He will then be able to put forward his agenda with less internal friction obstructing him from fulfilling his campaign promises of tax cuts. He has already been acting as the unofficial head of the government, though a successful snap election might make it official. With Salvini as the de-facto vanguard of European fiscal exceptionalism, markets will brace for what could be another budget battle between Rome and Brussels.

But this time the market impact may be more severe because the economic outlook has drastically deteriorated over the past few months. Major central banks in both developing and developed economies have cut rates or significantly scaled back their prior rate hike plans. A political shock out of Italy could resurrect the fear of another Eurozone debt crises that could bring down the Euro and global financial markets with it.

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CHART OF THE DAY: ITALIAN BOND YIELDS SPIKE, ITALY FTSE MIB PLUMMETS