Unrest Italy also puts euro under pressure

A report from ABN Amro shows that the financial markets had reservations about the budget plans of the possible coalition. And in times of unrest, investors opt for safe investments, such as German and Dutch government bonds. At this time, long-term interest rates fell, while Italian long-term interest rates rose considerably. As a result, the interest rate difference with Germany increased considerably.

After the Italian president refused to agree with an outspoken Minister of Finance, the two coalition parties still managed to reach an agreement (with a less outspoken minister). This means that the unrest on the markets has subsided somewhat and Italian interest rates have fallen again.

Interest rates remain low for longer
All in all, appoints ABN Amro mainly that there is a lot of uncertainty, and that it will continue for a while. The new government in Italy plans to spend more money, which will significantly increase the government deficit. ABN Amro therefore expects that the (already fallen) long-term interest rates in Germany and the Netherlands will remain low in the near future.

The bank also states in the report that it expects some recovery in the autumn. Interest rates could then rise further in 2019, partly under the influence of the (probably) less accommodative policy of the European Central Bank (ECB).

The euro is also coming under pressure
Also Of euro has come under pressure due to developments in Italy; this in combination with the somewhat weaker economic figures in the eurozone. ABN Amro expects that the pressure on the euro will continue for a while, both due to the unrest in Italy and the larger interest rate difference with the United States (US).

(Text continues below the chart)The euro-dollar exchange rate shows a negative trend, partly due to the unrest in Italy.

In addition, it appears that the expectation is that the euro-dollar exchange rate could fall towards 1,10. However, it should be noted that the currency may recover somewhat in the autumn. ABN Amro reports that the euro could rise again next year. This is because market parties then take into account that interest rate differentials with the US will decrease because the ECB will increase interest rates.

Will ECB respond?
from the minutes of the last meeting The ECB appears to be sticking to expectations regarding the economic prospects. However, the bank does say that uncertainties have increased. This means that new economic figures are closely watched. 

In any case, the bank does not give the impression that the developments are a reason to adjust its vision on future policy. ABN Amro therefore assumes that the ECB will reduce its purchase program in 2 steps (of 3 months) after September. This means that the first interest rate increase (of 10 basis points) is not expected until September 2019, and a second increase could follow in December.