Barclays Research discusses the EUR outlook in light of the ongoing Italian fiscal slippage and corresponded tension between the EC and the Italian government.
"We think medium-term concerns about Italian fiscal slippage will likely continue to exert downward pressure on the EUR in the coming months, restricting the single currency’s ability to post meaningful gains.
At current levels, we think a lot of negativity is already in the price; however, the near-term trajectory will crucially depend on: 1) the outcome of the budget discussions between the EC and the Italian government, and 2) rating agency reviews of the sovereign by both S&P (26 October) and Moody’s (no confirmed date but likely on the same day too).
As a base case, we expect tensions between Italy and the EC to mount in the coming weeks, bringing a lot of headline volatility and choppy EURUSD price action, leaving the pair to oscillate around our year-end 2018 forecast of 1.15.
Any meaningful concessions between Italy and the EC, although unlikely in our view, will make EURUSD retrace recent losses towards the top-end of its 1.13-1.18 range," Barclays argues.