Greg Gibbs, senior currency strategist, RBS sees no respite for European stock markets that slumped today. The Euro hit a near two-month dollar low after elections' impasse in Italy. FTSE MIB index tumbled 4.89 percent ending at 16,552 points, with deadlock in Italian parliament.
"The markets might find some comfort if it can believe there will be some kind of grand coalition in Italy. However, looking through that would still mean looking at a very unstable type of government," says Gibbs.
Also read: European shares rebound; Italy bond sale in focus
On the euro levels, Gibbs believes it could bounce up towards 1.3150-1.32 level. Anticipating the problems in Europe and Italy to continue, Gibbs opines the euro should come lower in the coming weeks.
Below is the edited transcript of Gibbs’ interview to CNBC-TV18.
Q: How are you reading the situation in Italy? The markets have pulled up from yesterday's lows, not by a whole lot compared to the carnage that happened yesterday. Do you think the European markets will remain jittery over Italy and today is just a bit of short covering?
A: The markets will remain jittery for sometime. Perhaps we will get a little bit more short covering. The markets might find some comfort if it can believe there will be some kind of grand coalition in Italy. However, looking through that would still mean looking at a very unstable type of government. It is clear that the recent election was a big vote against austerity. So, overall we have to presume we are going to go through a prolonged period of increased uncertainty. That means the equity markets should probably trade in a sideways fashion, but with some downside risk over the month ahead.
Q: The euro-dollar has seen a low of nearly about 1.3. Do you expect in this bout of volatility it could go down to as low as 1.26 or so? What is the key support level you are watching out for?
A: It has gone down and hit the first key support level around 1.30 level and we are bouncing along sideways here. It is possible we could bounce up towards 1.3150-1.32 level, but from there, one would be looking at selling it again. Ultimately, the risk is if we do break through 1.30 and head down into 1.25-1.28 kind of zone. Basically, these kinds of problems in Europe, Italy will persist. The economic numbers are also weak.
There is more data coming out through the course of this week, but the data coming out of France, particularly has been quite soft of late. This really does tell that inflation risks are falling, the economic risks and political risks are rising. All that leads to believe that the euro should come lower in the coming weeks.