Italian Politics Takes Centre Stage

Italian Politics Takes Centre Stage

Italy appears to be headed back to the polls, and there is a good chance that the two leading anti-establishment parties that won the last vote could increase their vote share in the rerun. The prospect of both Liga and the Five Star Movement increasing their mandate when polls are eventually held appears to have triggered weakness in the Euro. There were suggestions that the failure of the two Eurosceptic parties to form a government could potentially open the door to a return to more moderate, centrist politics in the Eurozone's third largest economy. However, markets have instead begun to believe that recent events would merely entrench anti-EU views amongst the Italian electorate and open the door for a more robust policy agenda from the two leading parties.

The Euro has the potential to rise if economic data improves but given the already soft data for the beginning of the second quarter and the poor Q1 results, this is unlikely to happen soon. Furthermore, the Pound is unlikely to gain much traction higher until Brexit risks are absorbed.

The main release in the week ahead is probably UK Manufacturing PMI for May, out at 9:30 on Friday, which is forecast to rise from 53.9 to 54.9. A higher than expected result would probably push the Pound higher versus the Euro, especially if the final Eurozone Manufacturing PMI result, which is out only a half an hour earlier, continues to show a contrasting move down. For the Euro, the main release in the week ahead for the Euro is inflation data, out on Thursday at 10:00.  


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