Forget about France; Focus on Italy now

As the 1st round of French election delivers an unsurprising result, the ECB has lost another reason to continue its monetary easing. Political instability is subsiding in the eurozone, forcing the ECB to pay more attention to underlying economic fundamentals, such as inflation dynamics.

If one assumes the ECB sets its pace of monetary easing with regard the the weakest (major) member of the EZ, then one should now turn to Italy. The pace of ECB easing could be particularly sensitive to any inflation surprise from that country. If inflation continues to surprise to the upside, then euro may continue to strengthen, and we are nearing the beginning of the end of the period of ultra-loose monetary policy in EZ.


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