EUR fall may reflect the Italian political uncertainty - AmpGFX

The EUR was quite volatile, consistent with the new paradigm of decreased liquidity in FX markets or phantom liquidity that can disappear suddenly, especially around key events, notes Greg Gibbs, Director at Amplifying Global FX Capital. 

Key Quotes

“This certainly makes for more exciting markets.”

“EUR fell in the lead-up to the Italian referendum in anticipation of a no-vote, and then oddly bounced after the event.  Confidence in global markets, related to factors such a broadening improvement in the global economy and anticipation of more infrastructure spending, over-powered Italian political risks.”

“But of course, the lack of response to a resounding no vote in Italy and resignation of PM Renzi last weekend, creating considerable political instability and risk of ant-establishment/anti-Euro government in coming months, is confusing.  It suggested that market positioning was short EUR and Italian assets ahead of the event and thus lacked the power to drive these assets still weaker.  It led many commentators to suppose that political uncertainty in Italy is not uncommon and may not matter so much.”

“It is, of course, difficult to quantify the impact of political uncertainty in Italy, and we should accept that the market could easily be distracted by other global developments.  But it does appear that currencies and perhaps markets more generally have become more disconnected from fundamental developments (including political) and more influenced by market positioning.  As such we are seeing delayed reactions to fundamental developments and/or divergent moves from fundamentals that can last for weeks or months at a time.”