Euro Shrugs Off Italian News But Downside Risks Persist

Includes: FXE, UDN, UUP
by: FXstreet

The euro managed to reverse early losses against the greenback as investors shrugged off the Italian PM resignation and risk appetite improved. Monti announced over the weekend he would resign once the 2013 budget is approved, potentially bringing forward an election due early next year.

European stocks were mixed with Milan and Madrid down, while Wall Street indexes turned positive after a negative opening as investors continue to wait for any sign of progress in fiscal cliff talks. There are some significant events to look forward to in the coming days. While the Federal Reserve announces it monetary policy decision on Wednesday U.S. budget talks may attract increased attention this week as the deadline for an agreement gets closer.

Euro reverses early losses

Even though the shared currency managed to recover ground and filled the weekly opening gap versus the dollar, it lacked momentum to regain the 1.2940 resistance area. The EUR/USD needs a clear break here to improve near-term picture, with the 1.2970/80 area as next target ahead of 1.3000. On the other hand, loss of 1.2885, intraday low, would open way for further losses towards initial 1.2840 and 1.2800 as longer-term studies remain negative.

"Italian political uncertainty from Mario Monti's resignation and the prospects of the return of Berlusconi shook equity and fixed income markets, but the EUR was unaffected and has consolidated along with the rest of the majors", says the TD Securities team. "For EUR/USD, it's worth pointing out that core eurozone-US 2-year spreads have pushed back to levels last seen in August, when EUR/USD was sub-1.25. That should foretell more pressure on EUR for the time being, although 1.2885/90-today's lows-should provide decent intraday support".

Meanwhile, the UBS analyst team holds a positive bias for EUR/USD. "As trend indicators are bullish, there is scope for the pair to resume strength", says UBS. "Resistance is at 1.2973 ahead of 1.3127. Support lies at 1.2840".

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