Italian Referendum 2016 Update: Euro Reacts To Renzi's Resignation

The euro recovered from a sharp drop in value following Italian Prime Minister Matteo Renzi’s constitutional reform referendum defeat and subsequent announcement Sunday that he would resign.

Between Friday — before voters would decide whether to reduce the powers of regional governments and the Italian Senate, a reform Renzi pledged to resign over if rejected — and Monday, the euro fell 1.2 percent against the dollar, to $1.0542 from $1.0672, before rising nearly 2 percent Monday morning, to $1.0735.

The value rebound, according to analysts, was largely the result of exaggerated expectations for the euro’s response to the political discord in Italy.

“There’s not a large political implication for the euro and the euro is also very overextended,” Mark McCormick, who leads North American foreign exchange strategy at Toronto-based TD Securities, told CNBC.

Many traders held their bets against the euro for too long, according to Reuters. They were looking to cash in on their wins by selling shorts, or bets that the currency will drop in value, before Thursday’s European Central Bank policy meeting has any impact on the market. The chief executive of the London-based fund North Asset Management, for instance, held positive forecasts for the euro.

“I think the euro is going to strengthen a lot now,” Nick D’Onofrio told the newswire. “I think it is way oversold.”

Others attributed the euro’s uptick to Renzi’s decision to resign so soon after the results of the referendum, in which nearly 60 percent voted “no” to his proposal, Agence France-Presse reported.

“The initial market reaction was to the downside, but Renzi’s decision to leave so quickly after the result meant that added clarity drove the euro and European equity markets to the upside,” James Hughes, an analyst at the London-based forex trading brokerage firm GKFX told AFP.

Markets may have calmed further in part due to soothing remarks from the president of Eurogroup, a collective of Eurozone finance ministers, regarding Rome’s “strong institutions” and the absence of any need for “emergency steps” to stabilize the bloc’s currency. Still, he hinted at worries that Italy’s Monte dei Paschi de Siena bank was one step closer to possible failure in the wake of Renzi’s resignation.

“The process of dealing with some of the banks that have problems need to continue and will continue,” Jeroen Dijsselbloem said, according to the Financial Times. Italy “is a strong economy, is one of the largest economies in the Eurozone—it’s a country with strong institutions,” he added.