Euro Flat Against US Dollar but the Market Is Pessimistic After EU Elections

Alan Penny

28 May 2019

3 min read

Euro flat

Tuesday saw German GfK consumer confidence fail to meet expectations, with a figure of 10.1 versus the forecast of 10.5.

The result was the lowest consumer confidence figure in over 24 months, which led to muted trading for the EUR/USD. Thus, the EUR/USD was trading at $1.1188.

European Parliamentary Elections in Italy Spark Concerns for the Future

The real issue for traders, however, is the continued pressure from Italy. The right-wing party fronted by Matteo Salvini won the European Parliamentary elections with 34.3%. They took 23 seats.

Neil Mellor, a BNY Mellon currencies analyst, claims that this win will only embolden Salvini and convince him that he should continue “doing what he is doing.” He also stated that the European Central Bank needs to make a statement to soothe market sentiment.

Salvini has long been advocating for a union among populist and far-right parties in the European Union to dethrone the parties that have traditionally held power in Brussels.

However, until recently, his party had been a regional one and few considered it a serious issue. The League’s win in the European Parliamentary elections, though, had a dampening effect on market sentiment.

This win could be attributed, at least in part, to worries over the European Commission imposing a 3 billion EUR fine on Italy due to rising structural deficit levels and debt, which the country should have kept under control. Salvini has promised the Italian people that he would do everything in his power to fight what he claims are unfair and outdated European fiscal regulations.

Why Is Market Sentiment Negative over Salvini’s Win?

Matteo Salvini heads up a nationalist and populist party that wants to make radical changes to the European Union from within. This populist movement supports Putin’s governance style, is inspired by Donald Trump, and is fixated on Europe’s Christian ancestry.

Ordinary people are looking to Salvini as some form of savior as they become increasingly worried over high unemployment and immigration issues. Some feel that other Italian political parties have ignored the League at their own peril and were in denial regarding how popular this party has become.

However, Italy is not the only country where a populist party has gained ground. France is in a similar situation with Marine Le Pen, and the UK with Nigel Farage. Some feel that this is a sign that things are about to change in the European Union in a significant way.

Salvini is likely to now fight Brussels even harder over the spending limits the EU imposed on Italy. They have plans to spend billions of euro on tax reforms but also on building an expensive rail connection between Turin and Lyon under the Alps.

Though the euro didn’t slide in trading, market sentiment is still uneasy. The European Parliamentary election results indicate that something is certainly wrong, and measures must be taken to solve the underlying issues instead of simply focusing on the symptoms.

Brexit Tensions Another Sign of EU Problems?

Though some consider Brexit tensions as a UK problem, others consider it a sign of more issues to come in the European Union. Salvini and others like him are using the United Kingdom’s departure from the EU as proof that all is not well.

Farage’s win in the U.K. is only adding fuel to the fire. Combined with a statement from Jeremy Hunt, who claims that a massive political crisis is looming in the U.K. if the Brexit issue isn’t resolved favorably, it seems only natural for market sentiment to be uncertain.

Written By
Alan Penny

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