There was a lot of head scratching yesterday as markets digested the Italian referendum result. As with Brexit and the US election, conventional thinking appeared to go out of the window. By the European morning, we had seen EURUSD recover the opening move lower seen at the start of the Asian session. Indeed, having been down 1% early on, the single currency ended the day more than 1% higher vs. Friday’s close. The Italian President asked PM Renzi to stay on to pass the budget early next year, which was perhaps one (minor) reason for the more positive tone emerging. Furthermore, Italy is not the Eurozone, so some of the projected implications of the result for the Eurozone as a whole were stretching things a little and were far more longer-term. For now, it’s a case of business as usual, not least because Italians voted to keep it that way. Usual does also mean a banking sector that is crippled and an economy that has yet to recover to its pre-financial crisis peak in output.
The data calendar is relatively light today, but data has remained secondary to the overall sentiment that has consumed markets in recent weeks, principally around the dollar as we head towards a Trump Presidency. Sterling continues to put up a good fight, especially against the dollar, but also against the single currency. The notion that sterling may be undervalued from certain angles is gaining traction in some quarters, helped at the margins by the on-going appeal hearing on the route the Brexit vote must take in Parliament.