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- What Italian BTPs tell us about EUR/USD: European session today
What Italian BTPs tell us about EUR/USD: European session today
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Loading...Today marks the start of the talks on the Italian budget for 2019, which will likely be the focus of European markets in the coming weeks and months. Although Giovanni Tria, Italy's finance minister, tried to calm markets by saying that the budget will respect EU rules and will maintain the budget deficit below 3%, his remarks were contradicted by the remarks of di Maio and Salvini, who stood behind their policies. Their planned policies, however, will further deteriorate Italy's fiscal position.
Italy's external debt is 124% of GDP (2,4 trillion euro), and Italy is the third largest economy in the EU. And the Italian bond market is the largest market for euro-bonds in the world. This is the reason why Italy puts all of Europe at risk: Italian BTPs are at risk of a sell-off, which would greatly depress the euro.
The uncertainty over BTPs in the last few days can be seen from the tight range it has been trading in for the past few days (last close 121.34):
The price has been falling for the past 5 months, which shows the sell-off in Italian BTPs, due to the policies of the new government. The descending triangle and the resistance from Fibo and the MAs point to a probable breakout to the downside: this means further BTP selling and a weaker euro. The decisive fundamental factor will be any news from the Italian budget talks.
The fall in BTPs since April coincides with the fall in EUR/USD:
The chart shows why the current talks on the Italian budget are so important for the euro.
Our expectations:
We will watch for any news from Italy's budget talks for signals for the direction of BTP prices, and from there for the direction for the euro.
Our recommendation is to open short positions on the euro-dollar at or around 1,1575. If BTP prices fall below 120 (available from Eurex Exchange), we recommend adding to the short EUR/USD at sound technical levels.
Source: Bloomberg Finance L.P., Eurex Exchange
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