Or is it proving to be a double-edged sword?
The initial market reaction in the euro certainly suggests it’s more of a double-edged sword but Italian bond investors are taking a different stance. As EUR/USD fell to a low of 1.1466 earlier, Italian bonds actually cheered the news here as yields fell.
The reaction in bonds is that if the government’s fiscal plan here is rejected, there’s a possibility that the targets will be reviewed and possibly be more fiscally responsible. Should that be the case, it sure does present an appealing outlook for buyers.
But I wouldn’t count on it, honestly. Italy’s government has been adamant to stick with the deficit targets and they’d much rather enter into a clash of heads rather than budge from their current stance. Just look at how Tria was cornered into accepting the 2.4% deficit target for next year.
This suggests that any hopes for buyers are extremely slim at this point and I reckon the move in the euro is more of the «right» reaction. We’ll only find out more about the details when Tria speaks to lawmakers at the top of the hour. But either way, a clash of heads domestically isn’t something to be happy about as it creates uncertainty. And as traders, we hate uncertainty. It’s only adding to a list of headaches for the euro caused by Italy over the past month.
As long as price holds below the 1.1500 threshold, the bias is more bearish and a further move to the downside is still very much on the cards. For buyers, only if we move back above that then we can start discussing a potential move higher. But as long as Italy’s problems are still at large, I would expect rallies to continue to be sold into.