Italian Election Dispute

EUR

Italian parties met on Monday to decide whether to reconvene Parliament immediately, with signs that some are trying to thwart far right League leader Matteo Salvini’s attempt to force a new election. Salvini, now Deputy Prime Minister in a year-old coalition with the anti-establishment 5-Star party, declared last week the governing alliance had become unworkable and he wanted elections as soon as October. He is betting his own surging popularity and decreasing support for 5-Star could deliver him an election victory. But the plan could backfire if other parties team up to oppose it, perhaps by luring 5-Star into forming a new coalition.

The League has filed a motion of no-confidence in the government with the Senate, and Salvini wants it to be voted on as soon as Tuesday. Parliament is in summer recess and he needs senators to agree to reconvene in order to consider it. Luigi Di Maio, the 5-Star leader, arrived stern faced at Parliament on Monday morning for talks with his own senators ahead of the meeting, declining to comment. He has accused Salvini of taking voters “for a ride”.

GBP

Sterling clawed back some ground on Monday, benefiting from political ructions in Italy that hit the euro, but concerns over Brexit kept the UK currency within sight of multi-year lows.

An unexpected second-quarter contraction in Britain’s economy had late last week sharpened the market focus on fears that the country will crash out of the European Union at the end of October without a transitional deal. Low liquidity and media reports that Ireland will not renegotiate the Brexit backstop at an expected meeting with British Prime Minister Boris Johnson this month also weakened sterling. The backstop, part of the withdrawal agreement that former Prime Minister Theresa May struck with Brussels in November but British lawmakers failed to ratify, is a major sticking point in efforts to agree an orderly exit.

USD

Increasing expectations that the U.S.-China trade war will impact American economic growth pushed the dollar lower on Monday. Analysts on Sunday said they no longer expected Washington and Beijing to come to a trade agreement before the 2020 presidential election. They lowered their forecast for fourth-quarter U.S. growth and said the chances a protracted trade war would lead to recession were rising.

Investors will also be focused on the U.S. Federal Reserve’s annual symposium at Jackson Hole, Wyoming, later in the week, seeking greater clarity on the future path of interest rates. Markets are expecting two to three additional rate cuts from the Fed by the end of the year.

Key Announcements

09.30 – GBP: Average Earnings Index QoQ; Forecast 3.7% against previous of 3.4%
13.30 – USD: CPI MoM; Forecast at 0.3% against previous of 0.1%
13.30 – USD: Core CPI MoM; Forecast at 0.2% against previous of 0.3%