EUR: Greater focus on political developments in Europe - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the election of President Trump has delivered a double blow to the EUR/USD rate sending it on the way towards a test of parity.

Key Quotes

“Further evidence of a rise in anti-establishment sentiment amongst the US public has heightened concerns over political risk in Europe in the year ahead. The upcoming constitutional referendum in Italy is very much in the market’s focus now. The global bond sell off is reinforcing the sell-off in the Italian government bond market ahead of the referendum. The yield spread between the 10-year Italian and German government bonds has widened sharply by around 0.6 percent since the summer to just over 1.8% reaching its widest level since May 2014.”

“The first round of the contest for the conservative nomination this weekend in France is likely to garner less market attention. The main contenders are Alain Juppe (a former prime minister under President Jacques Chirac), Nicolas Sarkozy (a former president), and Francois Fillon (a former prime minister). All three leading candidates are firm establishment figures setting up another contest against the anti-establishment, euro sceptic National Front. Alain Juppe is the current favourite to win the contest and ultimately prevail to become the next president. However, the market is likely to become more nervous ahead of spring elections as the establishment have lost the last two big votes resulting in Brexit and President Trump.”