Italian recession as a wakeup call for euro

FX:EURUSD   Euro / U.S. Dollar
The euro is rising for a fifth week in a row, encouraged by weaker dollar and better risk sentiment. The greenback continues to digest the Fed’s dovish message on rates. Powell, who is particularly careful about the message he sends markets, confirmed that the central bank had softened its stance and will take a pause in hiking. Despite a softer tone was expected by the markets, the dollar sagged and risky assets rallied.

Against this backdrop, EURUSD challenged the 1.15 barrier for the first time in three weeks and refreshes the highs on Thursday. However, fresh economic data made the common currency give up part of gains as euro zone GDP in the fourth quarter stayed at its lowest rate in four years. But the main concern is that Italy’s economy slipped into a technical recession as the GDP contracted by 0.2% q/q in Q4 after a 0.1% fall in Q3.

The government officials tried to calm down the worries as Di Maio said the GDP contraction shows failure of previous governments, while the prime minister Conte highlighted that the recession is temporary and due to US-China trade war. Anyway, the longer term, today’s data should serve as a wakeup call for euro bulls who are focused on the Fed’s dovish shift, as considering the budget issues, it’s hard to imagine how Italy is going to post a decent recovery this year.