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The euro is trading timidly above the all important $1.30 contention area against the U.S. dollar, an occurrence that will likely keep volume activity in the pair at fairly high levels as the wrestling to determine the next direction continues. As a reminder, the pair traded as cheap as $1.2966 last Friday, on notable USD-strength across the board.

The sellers are the side playing with advantage for now, with the latest development in the Italian political landscape reassuring euro skeptics that instability in the eurozone is here to stay for longer, a recipe for more hesitation to hold euros.

This weekend's main headlines in the Italian front suggest that center-left Bersani (his party obtained the most seats) said he may plan to form a government on his own as alliances from the other main parties looks improbable. However, a government which wouldn't enjoy enough support from the Senate seems a very inadequate option to implement fresh new changes.

Another rumor doing the rounds was uncovered by The Telegraph's editor Ambrose Evans-Pritchard, noting that

Italy's president Giorgio Napolitano is exploring the creation of a second technocrat government to break the political log-jam and calm markets after key parties failed to reach an accord, risking a serious popular backlash.

Despite the Italian political odyssey, key element to understand the ongoing selling pressure in the EUR/USD, the euro has been actually making some progress in the crosses.

However, investors continue to pile in on the USD long trade, a phenomenon gaining momentum over the past few weeks, as "systemic risks" within the eurozone build again, says Kathy Lien, founder at BK Asset Management.

As Kathy reports:

Eurozone economic data was actually quite good last Friday, with German retail sales jumping 3.1% in the month of January and eurozone manufacturing PMI revised up slightly to 47.9 from 47.8. Unfortunately economic data matters little when systemic risk has returned.

The fundamental commentator adds that last Friday's ECB's report that European banks only returned EUR12.5 billion ($15.6B) in LTRO payments vs EUR67 billion ($87B) the week before, in her words, was the main catalyst of the EUR/USD sell-off, "as lower LTRO repayments are negative for the euro because it reflects concerns about liquidity needs in banks" she said.

From a technical perspective, according to Sean Lee, founder at FXWW: "The break back below $1.3000 is a bearish sign for EUR/USD and selling rallies looks like the most logical play." The Sydney-based analyst, however, notes that "this move seems to be based more on USD strength rather than EUR weakness, with the single currency making gains against all the other majors" he says.

Marc Chandler, Global Head of Currency Strategy at BBH, also has $1.2880 as the main target for sellers, a significant level as it aligns with "the 50% retracement of the gains scored after ECB's Draghi promised to do whatever it took" Marc notes.

Chris Capre, founder at 2ndSkies, notes:

The key role reversal level at $1.3150 held, so bulls will need to take this out to gain any traction. Bears meanwhile are gunning for $1.2965 which is the weekly low.

Chris adds:

Considering the market every week for the last four weeks has had a minor pullback, I'll look towards selling on a rally instead of taking a short on the break, so will watch the $1.3150 area for any price action signals.

On the upside, as explained in a previous article, a sequence of nearby resistances will most likely see mid to high selling interest around $1.3035/40 - highest from last NY close - ahead of the $1.3050/55 February 28 swing low, with only break above the latter accepting $1.31 target speculations as valid.

Source: EUR/USD Wrestling Around $1.30