EUR/USD: the pair could drop to 1.10 due to Italy-EU conflict (Rabobank)

In a report published yesterday, Rabobank says that the euro was not affected by the outcome of the European Parliament elections, which resulted in only 25% of seats for the Eurosceptic parties, which is well below the 33% that some polls had predicted.

"However, yesterday's relief rally for the euro did not succeed in prolonging itself. Eurosceptic, anti-State or far-right parties led the polls in Italy, the United Kingdom, Poland and Hungary. The euro also remains sensitive to uncertainty about the series of changes that will be made in some of the key positions of EU officials this year.

In addition, the slowdown in growth and the threat of increased trade tensions between the EU and the United States also threaten to undermine confidence in the single currency in the coming months.

While Brussels' policy can be expected to continue to worry markets for the rest of the year, the emboldened position of the Italian populist Ligua in the weekend European Parliament elections also has the potential to weigh on the euro.

Deputy Prime Minister Salvini called for a "fiscal shock" of tax cuts to reinvigorate Italy's declining economy. It plans to move forward by committing to reduce income tax to 15% despite threats from Brussels to impose a fine on the Italian government for breaching budgetary rules.

While some commentators have argued that Salvini's policies will marginalise Italy, the threat to the euro is that investors will continue to view populism as a disruptive force.

In our opinion, the EUR/USD is likely to move closer to the 1.10 zone in a 3-month time horizon and the dollar should benefit from flows in search of safe haven values."