Europe: Political contagion risks run high in the year ahead - Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that the political contagion risks run high in the year ahead with Italy’s referendum on senate reforms Oct 2016, Dutch elections Mar 2017, French Apr-May 2017 and German Sep-Oct 2017 all carrying high risks of a strong rebuke by Eurosceptics.

Key Quotes

“EUR a sell into 1.12 and likely trades lower into year’s end (sub- 1.10). Hard to see EUR testing and breaking key 1.0450-1.06 support though – the Zone’s current account surplus has stymied EUR downside on numerous occasions when the integrity/fabric of the single currency has been threatened and could well do so once again.

GBP could easily recover to 1.3650 in coming days, backfilling last week’s gaps but prefer to be a seller on strength near term. A materially weaker GBP will play a crucial role in rebalancing the economy and cushioning likely recession. The BoE is more likely than not to cut rates and kickstart QE probably at their Aug 4 meeting too. Richard Franulovich.”