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The Italian referendum was telling in its “cast”. Prime Minister Matteo Renzi was putting everything at stake, while opposed by a famous Italian comedian trying on the political hat late in life.

Renzi pleaded to be given a free hand for political and administrative reforms, while Beppe Grillo promised citizens on-time garbage removal, free water pipes (some of them are privatized in Italy), solutions to environmental issues, resistance against migrants, an EU exit and returning to the local currency, the lira. Italians made their choice by denying the Prime Minister in constitutional reforms, deciding to leave everything “as is”. Matteo Renzi fulfilled his promise, and resigned.

Italian Ex-Prime Minister Matteo Renzi
Italian Ex-Prime Minister Manzi

Life is a struggle

In fact, the referendum was to draw a line under the clash of the Democratic Party of Italy and populist political movements including the League of the North, the Five Stars Movement, and the Left, Ecology, Freedom movement, which are all currently gaining political heft on the waves of political populism resonating among voters.

The Prime Minister asked the people to empower the Executive Branch and limit the role of the Parliament in order to advance social reforms, lower the retirement age and increase pensionable benefits.

But these proposals have not satisfied the Italian population, who voted 60% against the reforms, and Matteo Renzi’s notice of resignation landed on the President’s desk. The country’s leader found that immediate resignation is impossible and the Prime Minister is retained until the new budget has been adopted. At that point, Sergio Mattarelle has to decide on the dissolution and re-elections of Parliament or on the fate of a beheaded government.

Is Italy a problem?

The resignation of the leader of the Italian government was announced in advance and anticipated by stock players. All calculations reflect a subtle correction in the banking sector on leading stock markets.

A number of banks are associated with the Democratic Party of Italy, and eight of them are suffering problems. The oldest bank in Italy, as well as in the world, is now on the brink of financial catastrophy. These risks were known in advance as well. Monte Paschi, founded in Italy half a millennium ago, couldn’t stand the ECB stress test.

Bank Monte Paschi di Siena Entrance
Bank Monte Paschi di Siena Entrance

The Italian banking sector crash will place a heavy burden on Italian voters. First of all, their deposits are to be burnt and blocked, and other institutional investors and creditors are to face debt restructuring, probably Greek-wise, extended into summer and written off. The state and the ECB, in this case, are waiting for indirect challenges. Since January 1, 2016, the national banks are unable to be saved at the expense of governmental grants or administrative decisions, so the market response will be short-term.

A popular myth that the Five Stars Movement led by the clown Grillo will be able to initiate an Italyexit referendum may be popular among his supporters, but such a decision can only be made by the Constitutional Court.

EUR, USD, GBP

The EUR/USD currency pair cringingly “swallowed” the fact of the referendum like a pill and rushed into the long-awaited rebound, bolstered by a series of talks on Brexit and reduced pressure on the United States dollar. The Christmas rally will be “gifted” to two currency pairs, the Pound and EUR/USD.

EUR Italy Referendum
Euro rises in comparison to dollar just the third day after the referendum

Macroeconomic statistics of the United Kingdom assured traders that “all is well,” and preliminary consultations have shown that there are opportunities for European and British business to stay within the eurozone until 2021.

The euro was strengthened by sending the English Minister on Brexit to Brussels for a series of consultations to develop a common strategy with EU authorities. The past referendum only removed the state of uncertainty.

EUR/GBP
Initial results led to the fall of the euro, but by the end it managed not only to recover, but to even set an upward trend

Italy is left behind as end-of-the-year traders wait for the FRS meeting, which is almost 100% likely to result in a decision to increase the interest rate, and the US Electoral College vote, which has attracted attention by a spate of scandals and the refusal of two electors to vote for Trump.

Stock markets are waiting for the Trump trillion, interest rates are flat in developed countries, and credit facilities are cheap. The diverged chart of irrestrainably falling gold and the American S&P 500 index boosted up to its historical maximum tells us that the economic problems of individual countries won’t be felt by investors very soon.

In the long term, things could change, and no one can predict the election results pending in a number of eurozone countries. By that time, the European Union may take initiative to get rid of Italy and a number of countries from the problematic “PIGS zone” that are not responding or executing its requirements and norms for economic indicators.

In the first quarter of the new year, the EUR/USD pair could survive if all Brexit negotiation issues are settled by March 2017, when Theresa Mae, on behalf of the UK, will officially launch the procedure of exiting from the eurozone.

Much depends now on Donald Trump, and whether his pre-election promises will be put into practice by the beginning of spring. If the United States Congress supports all the initiatives of the new President, then the dollar will match the euro by next spring, and the British pound will finally restore the confidence of investors by that time.

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NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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