Euro jumps after Italy eurosceptic parties' attempt to form government fails

LONDON - 28 May 2018: The euro jumped on Monday and was set for its biggest one-day rise against the Swiss franc as a relief rally swept through currency markets after Italy’s anti-establishment 5-Star and League parties abandoned plans to form a government.

President Sergio Mattarella is expected to ask a former International Monetary Fund official on Monday to head a stopgap government amidst political and constitutional turmoil, with early elections looking inevitable.

Markets were relieved at not having to immediately deal with the likelihood of a eurosceptic government. But market strategists doubted the rally in the euro would be sustained.

“There can be many potential twists in the Italian political situation and we would be wary of reading too much into this latest development,” said Esther Maria Reichelt, an FX strategist at Commerzbank in Frankfurt.

“Structurally speaking, the U.S. economy is in far better shape than Europe, so any bounce in euro/dollar is short-lived.”

The euro initially rallied 0.6 percent to $1.1728, pulling itself above 6 1/2-month lows. It trimmed some gains to stand 0.4 percent up on the day at $1.1696.

The euro also strengthened by 0.8 percent against the Swiss franc, rebounding from near three-month lows, and was trading at 1.1629.

The euro has been weakened by the dollar’s rally and by widening bond spreads between Italian and German debt, as markets grappled with the prospects of a spendthrift coalition government in Rome comprising the two parties.

Goldman Sachs strategists said political uncertainty will remain elevated, because the prospect of new elections would remain a drag on the economy.

The euro’s surge meant that the dollar pulled back from a six-month peak of 94.30 hit against a basket of rivals on Friday. It was trading 0.2 percent lower on the day at 94.03.

Elsewhere, the dollar was flat against the Japanese yen at 109.42 yen. Risk aversion receded after U.S. President Donald Trump said on Sunday a U.S. team had arrived in North Korea to prepare for a summit between him and North Korean leader Kim Jong Un.

Trump had pulled out of the summit last week, which had sapped investor risk appetite and helped push the dollar to a two-week trough of 108.955 yen on Thursday.

The Australian dollar, which is sensitive to shifts in risk sentiment, gained 0.25 percent to $0.7569 after shedding 0.4 percent on Friday.

Trading volumes overall were set to drop with Britain and the United States, the two main financial centres for foreign exchange trading, both closed for holidays.