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Italy’s economy drags Euro down

Italian fourth-quarter GDP shows contraction for the second consecutive quarter, shattering the ECB's 2019 forecast for the bloc.

Brussels to penalise Italy for its ambitious fiscal plans

Italy officially slipped into recession as GDP growth dropped for the second consecutive quarter at the end of 2018, according to national statistics bureau ISTAT. Italian Prime Minister Giuseppe Conte blamed the 0.2 per cent decrease on external factors, including trade tensions between the US and China. It is the third time in a decade that the Italian economy has shrunk.

Italy’s woes weighed on the Eurozone, which only grew by 0.2 per cent as a whole. The EUR/USD pair dropped from its two-week high, having lost half a cent, and the GBP/EUR pair is floating at around 1.1450.

Across the Atlantic, Washington and Beijing shared little detail on this week’s two-day trade talks but claimed progress was made. US President Donald Trump suggested after the talks that he would meet with his Chinese counterpart Xi Jinping in February to seal the “biggest deal ever made”. The talks are one of the most crucial market-moving events that could set the tone for the rest of 2019, considering global growth has been lagging as the trade tensions continue.

Meanwhile, there is growing concern over Brexit in Germany. A group of top German economists told the European Union to tear up the Irish backstop and called for a flexible Europe of concentric circles that preserves friendly ties with the UK. The report by the German Ifo Institute and other universities across Europe has warned that Brussels may be playing a dangerous chicken game with the UK and that both sides would feel the repercussions.

Today is full of data releases. The European manufacturing sector has been showing confidence and the Purchasing Manager’s Index (PMI) indicates of how the manufacturing sector is faring in Italy, France, Germany and the UK. Then Eurozone inflation data will take centre stage at 10:00 (GMT), which is expected to show that inflation has fallen further from the ECB’s 2 per cent target rate to 1.4 per cent year on year.

Later this afternoon, US non-farm payroll data will reveal the health of the employment sector. The labour market is a key indicator of strength of the US economy. If the data misses expectations, it will cause volatility.

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