The bloc currency remains submerged in a sea of pessimism and uncertainty, accentuated after the final outcome of the Italian elections. The political hurdles now arising in Italy portend prophecies of further suffering for the EUR/USD, further intensifying after former PM Silvio Berlusconi and the leader of the anti-euro movement "Five Stars", Beppe Grillo, declined to make any alliances with either the centre-left or the technocrats led by Mario Monti. Why would they? Both already have what they were looking for, contrasting with the desperate need of Pier Luigi Bersani to guarantee some sort of governability and to comply with market expectations.
However, the resilience showed so far by the debt markets is curious, with yields in benchmark bonds of Italy and Spain netting no variations. Although this status quo could be put to the test, alongside with the events unfolding in the political arena. It seems only a matter of time now.
… Sword of Damocles
The day is almost here, as March 1st is the deadline for the so called U.S. "sequester". It seems pretty much inevitable at this moment, judging by the inaction of both Democrats and Republicans so far. It is worth noting that in the case the U.S. falls off the cliff, automatic spending cuts worth $1.2 trillion will be triggered across the board, hitting key fields like Education or Defense, just to mention only a couple, apart from endangering over 700K jobs and the continuity of social programs.
The greenback, measured by the U.S. Dollar Index, has been rallying as of late, but this bull-run would be mainly due to the fragile situation in Italy and the generalized weakness surrounding euro sentiment after the last ECB meeting, where President Mario Draghi pointed his darts to the euro exchange rate. Moreover, it seems that the vast majority of a "sequester" effect is yet to be assessed by the markets, adding buying interest to the greenback. It seems probable as well that market participants may be waiting for a last-minute patch, where politicians can kick the can down the road again, although markets should know by this time, as less than 48 hours remain.
All in all, further upside pressure would be expected for the U.S. dollar in the near-term, dragging the single currency to the initial target at 1.2998 (2013 lows), en route to 1.2880-1.2900, where the 50% of the Fibonacci retracement (move up from July'12 lows to February'13 highs) meets the 200-day moving average. Further downside impulse would then expose the relevant area around 1.2660/85, where converge the November lows and the 61.8% retracement. In addition, the RSI is showing a small rebound from sub 30 levels, although the indicator remains close to the oversold area.