The deadline for Catalonia to provide clarity on independence declarations has come and gone.
In the eyes of Madrid, the lack of a response was the same as Catalonia maintained in its demand for independence. Rajoy and the Spanish government have been unwilling to take their feet off the pedal. The prime minister's office stated that it would meet to activate Article 155 of the constitution regardless.
Article 155, although untested, is expected to suspend Catalonia's autonomy. EURUSD dropped immediately to 1.1770 before rallying right back. Despite the growing political crisis in Catalonia, as the region feels even more directionless, markets expect that Spain and EU will prevail. The faith in a dominate federalist system has limited political risk spillover into FX, yields or volatility. The situation remains fluid, with the next move likely to come from the Catalonian regional government. However, we remain sceptical of any contagion given the strength of Europe and would ignore headlines.