Byline: Shabbir Kazmi
Investors do not seem keen in buying euro because they are worried about the political situation in Italy, the possibility of a recession in Germany, the prospect of aggressive easing from the European Central Bank and the ongoing risk of more tariffs from the US on Chinese goods. This week, Italy's Prime Minister Conte resigned, turning crisis into chaos for the eurozone's third largest economy.
Of all the euro troubles, Italian politics has the most limited impact on the currency. Europe is no stranger to Italian political uncertainty (they just had elections in 2018 and who can forget Berlusconi's countless scandals) and this crisis was a long time coming. Instead of rising, Italian bond yields fell because investors are hoping that the new government will be more pro-business. Talks have already begun to form a majority in parliament, which could hopefully pave the way for a smooth transition for Matteo Salvini, who is widely expected to become the new Prime Minister.
Recession on the other hand is a serious risk for Germany. According to the Bundesbank, Germany's central bank, the country could very likely fall into a technical recession in the third quarter. Last week they predicted that GDP could continue to fall slightly. Growth has been weak for the past year as the country posted growth in only one out of the last four quarters. Unlike Italy, Germany is a serious problem for the eurozone. As the region's largest economy, their slowdown will be felt across the continent.
Although, it became evident last week that German and EZ PMIs rose in the month of August, the uptick in activity won't stop the European Central Bank from easing. Industrial production is weak, investor sentiments are bearish and there's a good chance that the upcoming German IFO business confidence index will decline as well. Auto sales have taken a big hit and fears of further tariffs along with a disorderly Brexit are mounting.
Just this past week, the US lawmakers urged the Trade Representative's Office to hold off imposing new tariffs on European olive oil. In November, the Trump Administration will decide whether to...