Italy has really dropped a bomb on the financial markets with the results of its parliamentary elections this week. No party secured an overall majority. Centre –left pre-election favourite Bersani secured a majority in the lower house but things are a lot messier in the Senate, where Berlusconi secured enough seats for a blocking minority.
Market tensions are bound to rise; Monti – the man who has delivered significant economic reforms and calmed market fears since he took over at the end of 2011 – received only 10% of the votes, while anti-austerity leader Berlusconi took almost 30% of the vote.
All eyes are now on the coalition-building process and how Italian bond yields respond. Benchmark 10-year Italian bond yields have risen by almost 9.0% today. The key concern in the financial markets is that Italy can form a government which sticks to its reform programme. It remains to be seen whether or not Bersani can conjure a coalition but market sentiment towards the Italian political situation is likely to remain shaky for weeks to come.
Moody’s finally downgrades the UK’s credit rating
Friday night brought the long-awaited loss of the UK’s AAA credit rating. The move was so well sign-posted that it can’t have caught any market players as a genuine surprise, though it still gave them an excuse to punish the pound further. Fortunately for GBP, the Italian election results have understandably stolen focus.
Looking ahead, the UK PMIs are coming up in the next week; Friday’s manufacturing gauge is expected to pick up slightly on Friday, while no change is expected within the second estimate of UK GDP in Q4 2012.
MPC policymaker Paul Tucker revealed today that no one in the committee thinks that quantitative easing has reached the end of the road, confirming that more can be expected later this year. Sentiment towards the pound remains very weak and it will likely take further panic headlines out of the eurozone for GBP to build on this week’s gains.
Bernanke remains dovish but dollar still rises
Bernanke’s speech today has confirmed that he still lies on the distinctly dovish side of the debate within the US Federal Reserve. The Fed Chairman stressed the benefits of quantitative easing and the costs of high unemployment. This suggests more evidence of momentum in the US recovery will be necessary before Bernanke begins to taper off QE3.
The safe-haven US dollar, along with the yen and Swiss franc, has been a key beneficiary of the tensions coming out of Italy. Firmer US data has also been supportive of the greenback, with consumer confidence and home sales figures coming in well above expectations.
End of week forecast
GBP /
EUR
|
1.1550
|
GBP /
USD
|
1.5025
|
EUR /
USD
|
1.3000
|
GBP /
AUD
|
1.4775
|
Sterling is trading at €1.16 today and while there is a significant chance of a further bounce up to the €1.18 level, on balance we expect this pair’s downward bias will take hold once again. In terms of GBP/USD, we are predictably comfortable with targeting lower levels. A move closer to $1.50 is likely before the next mini bounce. Meanwhile we are expecting lower levels in the EUR/USD pair, which currently trades at $1.3050.
Richard Driver
Currency Analyst
Caxton FX
