Strong swings are being seen on the currency market as yet another risk event is being shrugged off. The Italian constitutional referendum brought volatility on the rise again.
Over the weekend, Italians were asked to approve complex constitutional changes. Some experts believe that they were useless, some argued that they were needed. What was at stake, though, was Italy’s stability.
The reason for that comes from the fact that Prime Minister Renzi, exactly like his homolog David Cameron in the summer, bid his job on the outcome of the referendum. That is, if the changes are rejected, he will step down. He did, as Italians voted largely for blocking the constitutional changes.
This was supposed to bring the financial markets in a limbo as risks for insecurity spreading to other European countries were high. For a short while, those risks materialized. To be more exact, for a few hours after Monday’s opening.
Exactly like it was the case with the Brexit vote and Trump’s election, the market quickly shrugged off the bad news and all moves were completely retraced, and some more. The US equities closed in record territory the next day, the EURUSD enjoyed an almost three big figures rise, while the USDJPY was all over the place, not knowing what to follow: the general US dollar move or the US equities.
One good question at this moment would be how would have financial markets reacted if the UK didn’t vote for Brexit, if Clinton was elected and if Italy went for reforming the constitution. We’ll never know the answer to this, but one can only wonder…
Coming back to the Forex market, all eyes are on the ECB in two days from now as it is poised to extend the stimulus in the Euro-area. From my point of view, the European Central bank is facing quite a dilemma at this meeting: while inflation is clearly lagging behind, some improvements are being seen in other areas.
PMI’s are improving all over Europe, factory orders are on the rise, and even Greece looks better when compared with the previous months. This might call for a slightly optimistic tone at Thursday’s meeting, but the ECB won’t allow that. Inflation is the main concern and the key for the ECB is to be able to find a moderate tone so that bulls are being kept at bay, while bears do not leave the boat as well.
Once again, the ball is in Mr. Draghi’s court, and one thing is sure: embrace for even more volatility to come!