Euro rallies sharply despite Italian referendum result

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6 December 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Euro brushed aside the Italian referendum result on Monday, recovering strongly against both the US Dollar and the Pound, despite the resounding rejection of Prime Minister Matteo Renzi’s reforms and his expected resignation.

he single currency had fallen to its weakest position in 21 months against the US Dollar during Asian trading. However, investors viewed the sell-off as overdone, given the ‘No’ outcome had almost fully been priced in by the market, and the Euro retraced all of its losses before rallying sharply to back around the 1.08 level against the US Dollar – its highest level since mid-November.

A prolonged bout of political uncertainty now looms large in the country. Investors will remain concerned about the possibility of an early election next year, with the Eurosceptic Five Star Movement Party currently polling neck-and-neck with the Democratic incumbents.

Sterling briefly rallied to a two month high against the US Dollar yesterday, still buoyed by the growing possibility of a softer Brexit and a delayed triggering of Article 50. The Government’s four-day long appeal hearing on the triggering of Article 50 at the Supreme Court began yesterday. There was little market moving news with an outcome of the appeal not due until January.

Earlier the Pound received a slight boost from an impressive services PMI, which showed activity in the industry grew at its fastest pace in 10 months. The index rose to 55.1 from 54.5 and is now comfortably above its post-referendum lows (Figure 1). The index has now remained above the crucial level of 50 for each of the past 4 months.

Figure 1: UK Services PMI (2014 – 2016)

Economic news will pick up pace in the coming days, with Eurozone GDP numbers for the third quarter this morning being the main data release today. Investors will also have one eye on Thursday’s crucial European Central Bank meeting.

Major currencies in detail


With foreign exchange action centred on events in Europe, the Pound was little moved during London trading, ending 0.25% higher against the US Dollar.

Governor of the Bank of England Mark Carney delivered a fresh defence of the central bank’s near-zero interest rate policy in Liverpool on Monday. Carney, however, failed to provide any significant comments on monetary policy ahead of next week’s BoE meeting.

Traders paid little attention to Monday’s relatively strong services PMI which continued to suggest the UK economy was performing well despite the uncertainty created following the Brexit vote in June.

Political developments will remain the main driver for Sterling this week with a relatively light data calendar in the UK.


The Euro defied expectations on Monday, soaring 1.5% against the US Dollar after the widely expected Italian referendum result.

Economic news was mixed out of the Eurozone yesterday. The revised services PMI slipped to 53.8 in November from an initial 54.1 estimate. By contrast, retail sales rose more than expected, increasing by 1.1% in the month to October following a 0.4% decline in September. Investor confidence also dipped in December according to Sentix. The monthly confidence index fell to 10.0 from 13.1.

This morning’s GDP numbers will be released at 10:00 UK time, although are expected to remain unrevised. Focus will be squarely on this Thursday’s European Central Bank meeting, with the market now overwhelmingly coming round to the view that the ECB will extend its quantitative easing programme.


The US Dollar index slumped yesterday on the back of broad Euro strength, ending 1% lower.

Federal Reserve policymaker Charles Evans reiterated the need for higher interest rates yesterday. Speaking in Chicago, Evans expected inflation to move slowly back towards the central bank’s 2% inflation target, claiming that the US was “on the cusp of a period of rising interest rates”.

Traders overlooked yesterday’s non-manufacturing PMI, which smashed almost all expectations. The index rose to 57.2 from 54.8, driven largely by a sharp increase in employment and new orders in the sector.

The US Dollar will largely be driven by the ECB meeting this week, with little in the way of major economic news ahead of next Wednesday’s Federal Reserve meeting.