Lately, the European Central Bank stated that the regional bond market faces minimal impact from the Italian issue. Meanwhile, the gap between the yield of 10Y bonds of Italy and Germany expanded to 335 basis points. The European currency is sensitive about this fact. According to the daily statistics, the euro-to-US dollar rate plunged from the top of 1.1470 to the bottom line of 1.1403 after numerous attempts to break the $1.15 handle. As a result, the 1.14 handle is under a threat now.
At present, the greenback chews over the hint of the US Federal Reserve, while the euro is less vulnerable to the budget problem of Italy. However, it remains unsettled, and Rome can even face sanctions from the EU. According to the available data, the possible penalty for defiance can amount to EUR 3.4 million. For reference, the Italian government stands firm with the budget deficit set at 2.4%.
As for the long-term perspective, the EU can raise pressure on Italy, one of the leading economies in the euro-area, which definitely will play against the European currency. In particular, the gap can get wider. This situation is yet to be a reason for a panic. The gap is coming closer to 400 basis points and the European assets will be under increasing pressure from investors.
Moreover, the regional political risks do not promote the interest rate increase by the European Central Bank next year. Seeing the Italian issue, the players are no longer confident that the central bank may raise the rate until end-Q4 2019. However, this is just a guess, since the markets usually focus on expectations, and it still can get under the euro skin.