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13.08.2019 01:43 AM
Italy pulls down the euro again, while the pound tries to grab hold of a straw

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The EUR/USD pair unexpectedly fell below 1.1200 today and slumped to four-day lows in the area of 1.1170.

Since Monday's economic calendar is empty, the focus is on the escalation of tensions in US and China trade relations, as well as the political situation in Italy, where the likelihood of holding early elections is increasing.

In the near future, the leaders of the Italian Parliament should meet to decide when to put to the vote the question of no confidence in the country's Prime Minister Giuseppe Conte. The Five Stars movement and the center-left Democratic Party intend to create an alliance aimed at curbing the efforts of Deputy Prime Minister Matteo Salvini to take control of the government.

It is not yet clear how citizens of the eurozone's third-largest economy are ready to go to new elections. However, if they do take place, then M. Salvini, who, apparently, is aiming for the prime minister position, could once again promise to violate the EU budget rules. Recall that at the end of last year, the conflict between Rome and Brussels has greatly damaged the single European currency.

"Reports of the United States' introduction of new tariffs on Chinese imports made it possible for EUR/USD to grow to 1.12, but this dynamics is unlikely to be sustainable, because the consequences of the Washington and Beijing trade war will have a painful effect on the European economy," Westpac representatives said.

"Even if the Fed cuts its interest rate three times this year (to 1.375%), the Treasury will remain a highly profitable safe asset, which will continue to support the greenback," they added.

According to Westpac's forecast, by the end of this year, the EUR/USD pair will drop to 1.08 and will trade near this mark at least until mid-2020.

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Meanwhile, GBP/USD is attempting to recover after updating multi-year lows. The pair was able to attract buyers near the 1.20 mark.

The pound sterling was supported by the news that British MPs are developing an action plan under which they will require the government of Boris Johnson to transfer the Brexit deadline from October 31 to a later date. According to The Times, at this stage this seems to be the only way to avoid Great Britain's withdrawal from the European Union without a deal.

"Our basic scenario is that there will be some kind of extension, which is perhaps the most likely result, although we are now much less confident about this than at the beginning of the year. At the end of March, the probability of a "hard" Brexit was only at 5-10%, while now it is close to 50%," Allianz Global Investors said.

According to their estimates, the pound could be cheaper by 10% if there is no deal by October 31.

"The political turmoil that may follow will raise the chances of opposition Labour Party leader Jeremy Corbyn to become the next prime minister of the United Kingdom, which could bring the British currency down to par with the US dollar," analysts say.

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The USD/JPY pair has been declining for the fourth consecutive day, since US President Donald Trump said trade negotiations with China may not take place next month, as previously planned.

"We have an open dialogue. Let's see if we manage to keep the meeting in force in September. If it succeeds, it's fine, if not, it's also good," said the head of the White House.

According to analysts, this is only a matter of time before the USD/JPY pair breaks the 105 mark. This could happen already this week if data on retail sales and consumer inflation in the US do not meet expectations.

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Viktor Isakov,
Analytical expert of InstaForex
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