Waning Italy Political Risk Can Prop Up the Euro Only So Much

(Bloomberg) -- It will be hard for the euro to break free.

While the shared currency has recovered after touching a 10-month low last week, the bulk of its slide this quarter happened before investors started fretting about Italy. That means even if the concerns surrounding the rise of populism subside completely, the euro’s gains would still be capped.

Waning Italy Political Risk Can Prop Up the Euro Only So Much

“Our point is that people have forgotten that EUR/USD moved from 1.24 to 1.19 before Italy was even mentioned in the news,” said Andreas Steno Larsen, a currency strategist at Nordea. “So this is more than 50 percent dollar-based. EUR/USD can move to 1.19, if Italy moves completely into the background again, not higher.”

The euro, now trading around $1.1700, has seen its fortunes change dramatically this year: it rallied almost 3 percent in the first quarter on conviction the European Central Bank would raise rates as early as in March 2019; it has tumbled in the second quarter on growing doubts about the health of the euro-zone economy and concern that anti-establishment parties at the helm in Italy may seek to march the nation out of the euro.

Goldman Sachs, JPMorgan and Credit Agricole strategists recently lowered their euro forecasts.

Nordea is sticking to its call recommending that investors stay short the shared currency. The bank, which would take profit at $1.1450 or exit the trade if the euro went against it toward $1.1950, forecasts the currency will be at $1.1500 in three months.

©2018 Bloomberg L.P.