EU Political Risk Keeps EURUSD Underwater
Europe’s single currency remains well below the 1.3600 resistance level, currently trading at 1.3496, in the New York afternoon. Although there is a lot of concern over the ongoing financial crisis. It seems that fears have shifted a bit. Now, market wide pessimism seems to be targeting the region’s political infrastructure – which may well lead the currency lower or higher against the US dollar in the near term.
With former Italian Prime Minister Silvio Berlusconi fulfilling his promises to step down, ceding power to his successor, there is a rising distrust among individuals that Mario Monti may not be the right man for the job. Mainly, concerns have surfaced on the formation of his current cabinet – most of which were handpicked legal and financial sector leaders. Prime Minister Monti’s current choice for Minister of Industry and Infrastructure is Corrado Passera, CEO of the country’s largest retail bank. Granted, most of the other prominent Italian political parties refused to even take part in the formation of Monti’s cabinet. But, with technocrats, and not savvy politicians, now compromising a majority of the Premier’s cabinet, the process of quickly passing a resolution – which includes almost 3 billion euros in deficit reduction measures – is likely to be slowed down.
Problems are also stemming from a growing rift that has emerged between leaders of France and Germany. France, which is working towards lifting the cloud of a potential credit downgrade, is pushing for a greater role by the European Central Bank in an ultimate resolution for the region. This would include a lender of last resort role with an expansion of asset purchases that would widely remain free from sterilization. Current asset purchases by the European Central Bank are being sterilized in order to prevent potentially rapid inflation. The plan is being vehemently defended against by German leaders – who see the plan as creating more systemic risk and long term damage than solutions.
Without a unified front, the political divide that now splits the region’s two most influential economies is exemplary of the in-fighting that has beset the European Union for the last couple of years. This will likely add to increased speculation of either a peripheral economy (Greece or Portugal) leaving the Union or a much delayed resolution due to indifferences among members – a concern from the very beginning.
As a result, without any indications of European leaders working together on an aggressive and proactive solution to the region’s problems – as well regional governments unifying under their elected/appointed leaders – , traders are going to find it extremely difficult to buy euros for the time being.