British Pound recovered slightly on Friday; Euro recovers, US Dollar sells off 

The British Pound (GBP) recovered slightly on Friday as the fears of a complete dissolution of Theresa May’s cabinet eased.

The US Dollar (USD) exchange rates weakened against both the Euro (EUR) and Pound (GBP) and leaves some momentum with the European currencies heading into this week.

The Italian budget could be an issue for the Euro and Pound this week, but SwissQuote believes the losses could be limited around 1.12 in EUR/USD.

It was a disastrous week for the British Pound as Theresa May’s Cabinet crumbled all over again. A new Brexit secretary and some clear parliamentary opposition weighed heavily upon Pound exchange rates, even as the Euro remained solid and the Dollar was quiet after some cautious comments from the Federal Reserve’s Governor. Some good news was seen on Friday, as the GBP/USD and EUR/USD pairs were able to recover as Michael Gove indicated he would not resign at this time restored a little stability to otherwise chaotic proceedings. GBP/USD was back above 1.28 though GBP/EUR continued its abrupt slide towards 1.12.

Italian Budget and the Euro

While Brexit dominates headlines in the UK, the value of Pound exchange rates is also being affected by developments in Europe. The close trading relationship between the Euro and the GBP means that Italian budget concerns are very much Sterling’s concerns against the US Dollar. In their preview of the week ahead, Swiss Broker SwissQuote noted some of the developments to consider from last week, mapping out some of the problems that Euro/Dollar faced,

“The relationship between Italy and the European Union continued to deteriorate over the last few weeks as neither party want to make the slightest concession. The single currency inevitably suffered from this situation. EUR/USD fell to a fresh 17-month low as it reached 1.1216 last Monday, the lowest level since June 27, 2017.”

This downward progress was reversed slightly, however, as the Euro recovered later in the week, even as the Pound was devastated. The report from SwissQuote addressed the fact the desire from the European Union to patiently wait for the Italian Government to acquiesce to its point of view is evaporating and that there could be some penalties coming,

“Until now, the EU Commission has shown patience in listening to the Italian government’s argument; however, it seems that Brussels is done with the waiting and is about to initiate an “excessive deficit procedure” against Italy.”

Should this be the case then there are clearly some major headaches for the Euro down the line, and SwissQuote believe that it would likely create more pressure on the common currency, even if in reality the downside in Spot seems limited in their view,

“Activation of the “excessive deficit procedure” will most likely result in financial penalties. we believe that Italian assets will remain under pressure in the coming weeks. Regarding the FX market, the single currency has already greatly suffered from the persistent uncertainty stemming from this situation. Consequently, we do not believe that EUR/USD could not go much lower than 1.12.”

As a result, there could be a number of significant developments this week politically, with potential for major market moving headlines in Italy, in Belgium, and in the United Kingdom. The big things to look for sparking volatility are a leadership challenge against Theresa May, penalties from the EU on Italy, or in the other direction, anything that might lessen the risk of these two eventualities.

Source: ExchangeRates

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