The euro's problems: now also Spain

The euro/dollar pair yesterday tested multi-month lows: the last time the price was in the level of the 15th figure was in November last year. The european currency has entered the zone of turbulence and almost recoilless fall across the market. Moreover, the problems are growing like a snowball: now the focus of attention of traders is not only the Italian crisis, but also the events in Spain. However, everything in order.

Italy found itself in the position of political zugzwang, where every further step leads to a deterioration of the overall position. The refusal of the Italian President to appoint Paolo Savona as the economic minister only aggravated the political crisis in the country, although initially the markets took this decision positively. However, later it turned out that the members of the coalition are not ready to sacrifice this figure and will defend his appointment in any way. Party leaders said they could apply article 90 of the Italian Constitution, which allows members of Parliament to impeach the President of the country. According to politicians, the head of state exceeded his authority by refusing to appoint Savona to the Ministerial post.

The above article of the Constitution does allow the Parliament to "fire" the President, but many lawyers doubt that this decision will then be approved by the constitutional court of Italy. In addition, it is a rather long procedure, which can be delayed for many months. A special parliamentary commission must prove that the president has betrayed the interests of the state and violated the basic law of the country (despite the fact that the Italian President de jure has the right to approve or disapprove of the submitted candidates). In other words, most experts believe that the members of the coalition do not dare to launch impeachment procedure because of the high risks of image failure.

Therefore, there are two options: either the coalition will offer another candidate, or the country goes to re-elections. The first scenario is unlikely: first, the coalition-agreed candidate for Prime Minister Giuseppe Conte refused to lead the government without Savona. Secondly, representatives of the League and the five star Movement publicly insist on this candidacy: this figure has become a " cornerstone" for the coalition.

However, the option of a re-election is very likely. Moreover, if earlier we talked about relatively late deadlines (autumn or spring next year), we are now actively discussing the likelihood of new elections in July. This scenario is negative for the euro: according to recent polls, eurosceptics have only recently strengthened their positions on the electoral field, and in the case of re-elections can show a stronger result. Here again, an analogy with the Greek events arises, when as a result of the re-elections, SYRIZA confirmed its leadership status, and the far-right radicals from the "Golden Dawn" suddenly appeared on the third place in the parliamentary race.

It is not surprising that the Italian political crisis continues to put pressure on the European currency: in the light of recent events, the European Central Bank may take a wait-and-see position on QE, having voiced "dovish" rhetoric at its June meeting.

This scenario is quite likely, given the impending political crisis in Spain. In the coming days (most likely on June 1), the Spanish Parliament will consider a vote of no confidence in the head of government Mariano Rajoy. The prime minister may lose his post because of a loud and large-scale corruption scandal. Recently, a Spanish court sentenced the former Treasurer of the people's party, Luis Barcenas, to 30 years in prison, as he had long illegally financed the party, laundered significant funds and hid them in banks in Switzerland. And this is only one of the episodes of a high-profile criminal case, which caused tremendous political damage to the party of the current prime minister.

And although the former party treasurer was convicted of events of almost 20 years ago, and the prime minister himself was only a witness in the case, one of the opposition forces (socialists) took advantage of the situation and decided to remove Rajoy from his post, after which the country may hold extraordinary parliamentary elections. However, the socialists are not able to independently declare impeachment: they have only 80 "bayonets" in the parliament out of the necessary 176 ones. According to preliminary data, another 70 opposition members are ready to support the idea of socialists from other opposition parties. As we can see, the situation is not critical yet, but it is quite dangerous: if several more factions join the above-mentioned oppositionists, Spain will be on the verge of a full-fledged political crisis.

Thus, the European currency is in the grip of negative fundamental factors that reduce the likelihood of completion of the ECB's incentive program within the framework of the previously announced terms.

Despite such a gloomy fundamental background, I would warn traders against short positions on the EUR/USD pair. The pair reached six-month lows and, taking into account the rate of decline, the price correction is technically long overdue. Also, keep in mind "insidious" political fundamental factors because of their unreliability. For example, if on Friday the Spanish Parliament does not support a vote of no confidence in the prime minister, and in Italy will agree to the "government of technocrats" (until the new elections), the European currency can suspend its decline and demonstrate a significant corrective growth.

Already today, the euro is trying to dominate in all pairs, thanks to rumors that the Spanish socialists will not find allies to shift from the post of Mariano Rajoy. If the situation develops in the next few days in a similar way, the eur/usd pair may continue the correction to the first resistance level of 1.1675 (Tenkan-sen line on D1). It is too early to talk about further upward goals: everything will depend on the further steps of Italian and Spanish politicians.