There was talk that the Italian elections could be moved to as early as September 2016, should parliament pass an electoral law to decide the terms of the elections. However, just this week, the proposed electoral law failed to pass following intensive debate. I will now look into the motivations of the main parties in holding early elections, and analyze whether Italian elections will be probable this year.
First, the ruling Democratic Party led by Renzi wants early elections in September before the party releases details of the budget in October. The budget is expected to touch on austerity measures, which are required as part of the agreement for the EU to bail out Italian state bank Monte Dei Paschi. These measures may not be palatable to voters, and hence it is in the Democratic Party's interest to hold elections prior to the release of the budget.
Second, close behind the Democratic Party in terms of popularity is the Five Star Movement, led by Beppe Grillo. When the prospect of September elections was first mooted, it was in the interest of the Five Star Movement, as polls then had showed them being neck-to-neck with the Democratic Party with around 30% of votes each.
However, after the electoral law failed to pass, the picture is now quite different. The Five Star Movement did very poorly in national elections last week, a far cry from the 30-30 polls they enjoyed versus the Democratic Party previously. In fact, the Five Star Movement failed to make the run-off in 25 of the main cities, and their poor showing was attributed to infighting and weak candidates.
As such, the Five Star Movement might be more wary of gunning for early elections, and they may prefer to wait for the unpopular budget to be passed before running for elections next year. Given their low popularity figures at the moment, they may prefer to ensure the electoral law does not pass through parliament - as an election can only be called when the law has been passed. Hence, I expect them to use means to obstruct and delay the passing of the law and wait for a time when popularity figures are higher.
As a side note, it is interesting why the popularity of the anti-establishment, anti-EU Five Star Movement has dipped so much. Public sentiment might have been swayed away from the Far Right after seeing how the UK is still plagued with troubles negotiating its way out of the EU, and the masses might have looked at how Macron's election victory appears to have reunited the country.
In any case, I expect Italian elections to be held next year instead of this year. If so, the biggest beneficiary could be the EUR. The EUR traded to a high of around 1.13 against the USD this year, before falling back down to current 1.1175 levels. The pullback was due to a mixture of fears surrounding an imminent election held in Italy, as well as 1.13-1.14 levels providing strong resistance from a technical point of view.
Should Italian elections turn out to be a red herring, courtesy of the Five Star Movement throwing a spanner in the works and delaying the passing of electoral law, I would not be surprised to see the EURUSD receiving a boost to test 1.14 resistance levels.
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