Europe to regain the spotlight

In recent weeks the focus has been on escalating global trade tensions and implications for markets. Tonight, it is Europe’s chance to regain the spotlight at its monthly ECB interest rate meeting and courtesy of problem child, Italy again waving a defiant fist at Brussels.

Firstly a few words on the ECB meeting at which no change in interest rates is expected. Instead, the focus will be on the details of the latest targeted longer-term refinancing operations (TLTRO). In simple terms, TLTRO is an ECB monetary policy mechanism that provides cheap funding to banks in the hope that banks will lend the money out to business and consumers to stimulate the economy.

Also, at tonight’s meeting, the ECB will publish its updated macroeconomic projections. With geopolitical risks from the trade war rising, core inflation entrenched well below the ECB's target, along with soft economic data, the ECB is expected to confirm that economic risks are to the downside and for ECB President Draghi to adopt a dovish tone.

Also bubbling away in the background is mounting concern over Italy. If you recall, Italy is governed by a coalition of two populist parties, Lega and the Five Star movement which have promised to cut taxes and increase spending to stimulate a stagnant Italian economy.

A policy mix that would add to Italy’s monstrous pile of public debt and prompted the IMF to warn overnight of the risks posed by Italian debt. Reports also surfacing that the EU would commence legal proceedings against Italy, unless it reduces its budget deficits.

Contrary to reducing budget deficits and as a creative way of avoiding breaking eurozone deficit rules, the Italian government has floated the idea of a parallel currency. The mini BOT, as it is being referred to, would be used to finance deficit spending. If the mini BOT were introduced, it would be the end of the eurozone and likely a catastrophe for markets.

While common sense is expected to prevail, the threat of the mini BOT, like the ECB meeting tonight present downside risks to the EURUSD. This goes a good way to explaining the EURUSD rejection of higher prices overnight, to return to the comfort of its former 1.1250/1.1100 range.

Source Tradingview. The figures stated are as of the 6th of June 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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