Italy Faces Tough Times, So Does The Euro

 |  Includes: FXE, UDN, UUP
by: FXstreet

The euro was taken hostage by dark selling forces on Monday, as hysteria hit the global markets following an unresolved Italian election, in which none of the 4 front-runners' parties managed to get a majority in the Senate, leading the country to prospects of ungovernability.

As reported earlier today, conditions in the euro were always set to be subject to the outcome of the Italian elections.

According to the latest reports, which show a 99.9% ballot scrutiny conducted, Italy's center-left Bersani won by a slim margin in the lower house, while the Senate is confirmed to be deadlocked.

The failure to build a coalition between the center-left Bersani's party in both chambers will now make any austerity-led implementation laws taken by the uncertain government a slow and difficult process.

Amid this scenario, Italian bonds are poised to be liquidated as the unrest over the stability of the country reaches new highs. By proxy, the more the anxiety to hold Italian debt grows, the less attractive the euro becomes, hence helping to reason the massive 2.5 cents decline in the currency from highs to lows on Monday.

According to Kathy Lien, co-founder at BKAssetManagement, "the results are a complete mess; while Bersani appears to have won the lower chamber, Berlusconi may have won enough votes in the Senate to block his win."

As The Wall Street Journal notes, "The result is that Italy may, over the next few weeks, try to form a temporary government backed by a grand coalition of left and right-wing forces with the sole aim of changing Italy's electoral law and then going to a vote again as early as summer. It isn't clear who would run such a short-lived government."

The current state of affairs in Italy, despite the uncertainty of what party will eventually come to power in Italy, does clear up the picture in terms of the euro outlook, which seems poised for further headwinds.

So now that we see the euro allure in its most decadent phase since last May last year -- as per the intensity of its weekly declines -- investors' mindsets will now likely shift to Italy for the near-future, before the focus returns to either growth outlook or monetary policies by the European central bank.

The euro fall has characteristics of panic selling based on the demerits to maintain a stable government in Italy. What is hammering the euro's value is that, unless the panorama in Italy changes dramatically, further legs down in the euro are probable. However, since the fall has been too hard, too fast, we might need first a higher neutral zone where sellers may find value to reinstate short bets. As the technicals stand, 1.3130/40 resistance is the first royal battle where traders will be camped.

While the attention is on Italy, one big risk event for Tuesday will be the Fed Governor Ben Bernanke's 2-day testimony to Congress on monetary policy and the economy on February 26 and 27. His comments will influence the volatility of the USD, and are expected to shed a light after the last Fed's minutes-induced volatility, in which the USD rose strongly.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.