Euro still drifting lower

The euro is drifting lower against the dollar this morning, extending last week’s losses, against the backdrop of political developments in Italy, where a coalition government of Five Star and League – the markets’ ‘nightmare scenario’ before the recent election – may be about to become a reality. The single currency shed the best part of 2 cents against the dollar last week and is softer again, at $1.1725, as this week kicks off

Italian bonds sold off sharply again on Friday. In particular, 10-year yields rose by more than 10bps to bring the cumulative increase over the week to 35bps – with spreads over equivalent German bond yields widening out by similar amount – and they are another 6bps higher, at almost 2.30%, at the open today

There was a “risk off” tone to markets on Friday, probably related to events in Italy, with equity markets softer and bond yields falling in the core markets. Yields still rose over the week as a whole though, led by the US with 10-year yields there ending almost 10bps higher (at 3.06%) from the previous Friday’s close. Higher US yields relative to elsewhere is providing support to the dollar, which is firmer across the board (and not just against the euro)

Some important data are due over the course of this week. Flash PMIs for the Euro area are scheduled for Wednesday, with CPI in the UK on Wednesday as well followed by retail sales on Thursday and a second estimate of first quarter GDP on Friday (the preliminary estimate showed UK growth slowing to 0.1% q-o-q from 0.4% in the final quarter of 2017)