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Stormy conditions for Euro as Europe mired in political risk

Stormy conditions for Euro as Europe mired in political risk

The crushing defeat for Renzi in yesterday’s Italian constitutional reform referendum has triggered further financial turbulence for Europe. The Euro fell as far as 1.0507 against the Dollar and 1.2000 versus the Pound, hitting 20-month lows as Prime Minister Matteo Renzi announced his intention to resign. The Italian President has 70 days to form a caretaker administration, but the Five Star Movement will attempt to capitalise by pushing for a general election as soon as possible.

European stock index futures and Italian bonds slumped amid the mounting pressure of political risk storming the Eurozone. Volatility has risen. President of the European Central Bank (ECB) Mario Draghi must factor Renzi’s defeat and resignation into his evaluation of the ECB’s QE (money-printing) programme on Thursday.

Friday’s UK construction PMI index printed slightly above expectations at 52.8 from 52.6, the strongest figure for eight months. The British Retail Consortium (BRC) shop-price index recorded a 1.7% decline in prices in the year to November which does not suggest that inflation pressures have increased significantly.

The markets continue to re-price the Brexit risks with greater expectations that there will be some of form of deal to keep favourable access to the EU single market. In this context, there was reduced uncertainty of a hard Brexit and this lessened fears of substantial damage to the financial services sector. These factors were an important element in UK currency breaking above 1.2700 against the Dollar for the first time in over eight weeks late during Friday’s US Trading session.

The U.S Dollar moved lower against a basket of currencies throughout trade on Friday following a softer than anticipated nonfarm payroll print. Unemployment fell sharply to 4.6% from 4.9%, the lowest rate since July 2007, which reinforced expectations that the economy was very close to full employment. In contrast, there was a much weaker than expected figure for earnings with a 0.1% decline cutting the annual growth rate to 2.5% from 2.8%.

There was no change in expectations surrounding the December Federal Open Market Committee policy meeting with a rate hike fully priced in, but the timing of the next potential increase in 2017 was pushed back slightly which had some overall negative dollar impact. Today in the US, the Non-manufacturing ISM is expected to have marginally increased in November to 55.5 from 54.8 previously.

Data to watch: UK Supreme Court Brexit Appeal hearing starts. 9am EUR Markit PMI’s Services & Composite. 9.30am UK Markit Services PMI. 2.45pm US Markit PMI’s Services & Composite & ISM Non-Manufacturing, Labour Market Conditions.

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