One and two euro coins sit in this arranged photograph in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Euro Slides to 16-Month Low, Pound Sinks as EU Risks Reignite

(Bloomberg) -- Political risks gathering across Europe are back to haunt investors.

The euro slumped to its weakest level in more than 16 months as the European Commission looked ready to escalate its budget battle with Italy. Meanwhile, the pound slipped the most in more than a month as pressure mounted on U.K. Prime Minister Theresa May to abandon her Brexit divorce proposal or face defeat in parliament.

The euro and the pound have both declined more than 4 percent this year against the dollar as Italy’s political turmoil, the U.K.’s so-far evasive Brexit divorce deal and the European Central Bank’s accommodative policy damp appetite for the currencies. Traders fear that the string of soft economic data may force the Governing Council to lower its economic growth projections at its December meeting, with Goldman Sachs saying that policy makers could be forced to delay the start of rate increases if the slowdown is worse than anticipated.

Euro Slides to 16-Month Low, Pound Sinks as EU Risks Reignite

The euro declined 0.6 percent to $1.1265, its weakest level since June 2017, while the pound slid 0.4 percent to $1.2916. Hedge funds and other speculators increased their short positions on the euro by 14,181 contracts in the week ended Nov. 6, taking the total to 46,843, the most bearish since March 2017.

A sovereign investor that had supported the euro above $1.1300 in late October by holding a double no-touch structure was absent Monday as the option seems to have expired, according to a Europe-based trader who asked not to be named because the person isn’t authorized to speak publicly. The drop was exacerbated by thinner demand around the euro’s August low of $1.1301 and a number of stop-loss trades.

In focus now for the currency is key technical support at $1.1187, which represents the 61.8% Fibonacci retracement of its gains since early 2017.

In Italy, Deputy Premier Matteo Salvini said Sunday his government could halt European Union budget decisions and other policies if the bloc’s partners continue to show disrespect to his countrymen.

In London, May’s cabinet had been expected to meet as soon as Monday to sign off on May’s plans, but late on Sunday there was no sign of further progress, according to three people familiar with the matter. If May wants a deal sealed in November, this week is probably the last chance to corral her divided Cabinet.

The pound pared its losses on Monday after the Financial Times reported that EU’s chief Brexit negotiator, Michel Barnier, as saying the main elements of an exit treaty are ready to be presented to the U.K. cabinet on Tuesday. His comments were a reiteration of previously published news.

The euro’s 40-day correlation with the pound has been steadily creeping higher and is now at 0.80, suggesting the two are moving pretty much in lock-step.

The euro’s weakness propelled the dollar higher for a third day, with the Federal Reserve on track for its fourth 25-basis point hike this year in December. Producer prices in the U.S., the world’s largest economy, accelerated in October, suggesting consumer-price inflation may pick up down the road.

©2018 Bloomberg L.P.