EUR/USD – Euro Drops as Italy Election Produces Stalemate

EUR/USD lost over one cent on Monday, after the results of the Italian parliamentary elections were announced. With no clear winner, Italy is braced for intensive bargaining between party leaders to try and form a workable coalition. The day’s big winner was Beppe Grillo, a former comedian whose 5 Star Movement party won more votes than any other party. The inconclusive results have raised fears about political instability in Italy, the Eurozone’s third largest economy. There are no Eurozone releases on Tuesday, but the markets in the US will have plenty of economic news to sift through, including three key releases. In Washington Federal Reserve head Bernard Bernanke testifies before the US Senate Banking Subcommittee. As well, CB Consumer Confidence and New Home Sales will be released later on Tuesday.

 Elections in Italy are traditionally boisterous and colorful events, and the results of this election certainly didn’t disappoint in that regard. The 5-Star Movement, which was largely a protest movement run by Beppe Grillo, a former comic, shocked pundits by winning the most votes. Grillo’s party now becomes the key to any chance of forming a coalition. The Center-left bloc, headed by Pier Luigi Bersani, won a majority in the lower house of parliament, but there was no clear winner in the upper house. This leaves the country in a political stalemate, as any coalition cannot govern without forging a majority in both houses. Prime Minister Monti’s centrist bloc fared poorly at the polls, reflecting widespread voter dissatisfaction with the former Prime Minister’s severe austerity measures. The deadlock represented a worst-case scenario for the markets, which is concerned that political instability in Italy could affect the entire Eurozone. The euro has made up some ground after Monday’s sharp losses, but remains under pressure.

In the US, the Federal Reserve will again be in the market spotlight on Tuesday, as Federal Reserve Chair Bernanke testifies before the US Senate Banking Committee. Recently, the Fed released the minutes of its most recent FOMC meeting. The minutes indicated that policymakers had discussed slowing or even stopping the current round of QE before the US employment situation improves, which was an about-face in the Fed’s stance. Previously, the Federal Reserve had stated that it would not terminate the current round of QE before the US unemployment rate fell to 6.5%. Bernanke will likely be questioned about this issue at the hearing, and we could see some fluctuations in EUR/USD, depending on the markets’ reaction to Bernanke’s testimony.
 

EUR/USD for Tuesday, Feb 26, 2013

EUR/USD Feb 26 at 11:30 GMT

1.3086 H: 1.3119 L: 1.3018

EUR/USD Technical

EUR/USD took a tumble on Monday, and continues to struggle, trading in the high-1.30 range. The pair is testing the 1.3080 line, which has seen activity on Monday and Tuesday. The is stronger support at the round number of 1.30. This line has not been tested since the first week in January. On the upside, there is resistance at 1.3130. This is followed by a resistance line at 1.3170. 

• Current range: 1.3080 to 1.3130

Further levels in both directions:

• Below: 1.3080, 1.30, 1.2950, 1.2882 and 1.2802.
• Above: 1.3130, 1.3170, 1.3280, 1.3350, 1.34, 1.3480 and 1.3568

OANDA’s Open Position Ratios

The EUR/USD ratio continues to point to movement towards long positions. This is not reflected in the current movement of the pair, which has been under pressure following Monday’s sharp losses. The EUR/USD ratio is almost an even split, thanks to the recent movement towards long positions. This indicates that trader sentiment is closely divided as to where EUR/USD is headed.

The euro took it on the chin following the election results in Italy, which were clearly not the market’s liking. As Italian politicians try to make sense of the new political reality, we could see further volatility from EUR/USD. With three major releases due out of the US later, it looks to be anything but a quiet day.

USD/CAD Fundamentals

• 14:00 US S&P/CS Composite-20 HPI. Estimate 6.7%.
• 14:00 US HPI. Estimate 0.6%.
• 15:00 US CB Consumer Confidence. Estimate 60.8 points.
• 15:00 US Fed Chairman Bernard Bernanke Speaks. Bernanke will testify on the Semiannual Monetary Policy Report before the Senate Banking Committee.
• 15:00 US New Home Sales. Estimate 381K.
• 15:00 US Richmond Manufacturing Index. Estimate -4 points.

*Key releases are highlighted in bold

*All release times are GMT

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