In a pre-FOMC session in which the dollar generally struggled after the core CPI numbers, the euro found it difficult to capitalise. In part this is due to renewed uncertainties around Italian politics and Press reports locally that President Sergio Mattarella will dissolve Parliament this month and set a March 4 election date. Under the Italian Constitution, the vote has to be held before May 20th.
Paolo Gentiloni on Monday celebrated his one-year anniversary as Italy's Prime Minister, an office he took after Matteo Renzi resigned following a humiliating defeat in a national referendum. A new electoral law known as “Rosatellum” had to be passed in October because Italy’s two houses of Parliament had different election systems. Under the Rosatellum law, there will only be a clear-cut winner if one party or bloc receives over 40 percent of the vote.
Recent opinion polls show a centre-right coalition ahead, followed by the Five Star Movement and Gentiloni's Democratic Party, but all of them several points away from the 40% bar. Given this uncertainty, 10-year Italian bond yields yesterday jumped 10bp. Although there was no contagion into other peripheral Eurozone bonds, investors haven’t recently needed much of an excuse to sell EUR and the Italian news was the trigger for its latest underperformance.
Away from the serious but sometimes very tedious business of politics, there’s an ECB Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. With Eurozone monetary policy likely to be on hold for a very long time, the main interest amongst analysts is the colour of Draghi’s tie. Yes, honestly!! If we look back over the last three years, there have been 5 announcements on QE. On four of these he wore a blue tie, the first three being the same blue tie he wore when he famously vowed to do “whatever it takes” to save the euro”. October was a light purple. Since January 2015, he has never announced a policy easing whilst wearing a red tie. So, if you’re at your screens for 2.30pm Frankfurt time, watch to see how EUR/USD reacts as he walks into the Press Conference…
With the FOMC Press Conference now behind us, EUR/USD opens in Asia at 1.1818 with AUD/EUR at 0.7635.