Conte Govt Breaks Down

Following an unsuccessful attempt at keeping Italian PM Giuseppe Conte's government majority alive, markets are now digesting the news that former ECB head Mario Draghi has been invited in for formal talks regarding the possibility of him taking over as PM and forming a new government.

Conte has been the head of a fraught and precarious coalition government for more than two years, managing (up to now) to balance a government comprised of nationalists and and anti-establishment activists and then one comprised of anti-establishment populists and the left.

However, with growing dischord among the fragile union of Conte's government, the game was up last month when Matteo Renzi (former PM) pulled his party, Italia Viva) out of Conte's camp. Renzi had been discontent with Conte's handling of the COVID pandemic and his failure to use all of the resources made available by the ECB as a means of fighting the pandemic.

Draghi Invited In

With Conte's attempts at establishing a third government having failed, Draghi has now been invited in for formal talks today by President Mattarella. The hope is, that given Draghi's shining credentials and his reputation as having saved the Euro in the wake of the GFC, he will be able to restore Italy's economic health. The domestic economy, which was already struggling before the pandemic, has been decimated by the crisis.

The alternative to Draghi taking office would be to hold early elections in the wake of Conte resigning late last month. However, given the fractured political divide currently, it is unlikely that any party would win (or be able to form a coalition) meaning that the country could be left without government for months.

President Wants Draghi

In a televised address, the president told the Italian people: “I have the duty to emphasize that the long period of electoral campaigning, and the resulting reduction of government activity, would coincide with a crucial moment for Italy’s fate, We cannot afford to miss this fundamental chance for our future.”

However, despite his credentials and strong support among some elements in the political spectrum, it is not yet clear whether he will receive enough backing. However, given the fragile state of the Italian economy and the need to properly utilize the more than 200 billion EUR in pandemic relief funds from the ECB, he seems the best bet.

Technical Views

EURUSD

The correction in EURUSD has seen price reversing from the 1.2346 2021 highs. Price has now broken below the 1.2090 support level and is testing the rising channel low. While the channel holds, the current move is seen as corrective and a continuation higher is still preferred. However, should price break below here, the next support zone to watch is down at 1.1802.

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