EUR/USD: Italian risks resurface

Italy is back on the agenda as focus turns towards the regional Italian election. Government stability to wobble on Salvini win.

Italy is back on the agenda for the euro after 5 Star Movement (5SM) Party Leader Di Maio announced his decision to step down earlier this week. With this coming before a decisive regional election in Emilia-Romagna on Sunday, risk premium attached to Italy could be on the rise amid concerns over the stability of the 5SM and Democratic Party (PD) coalition. Emilia-Romagna is typically a centre-left stronghold and thus the PD party would be expected to win the regional election.

However, given the sizeable lead in the national opinion polling for Salvini’s League party and with regional opinion polls showing the centre-left and centre-right are neck and neck, there is an increasingly risk that the centre-left rule could be replaced for the first time in over 70 years, which would mark a huge achievement for Salvini’s party. In turn, this would heighten concerns that Italy could be on course for another election in the near term, thus placing pressure on the euro, as well as Italian assets (FTSE MIB + BTPs).

Italian regional election opinion polling

Italian election risks to spark wider Bund/BTP spread

In recent months, foreign investors have stepped up their exposure to Italian debt, therefore rising risks that Italy could once again be heading back to the polls providing us with greater confidence. A widening of the Bund/BTP spread towards 200 basis points will see Italian assets underperform, making EUR/JPY an attractive option on the downside.

EUR/USD price chart: daily time frame

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