Italian Politics Hit The Euro; Support At $1.2880 To Pause Sell-Off?

Includes: ERO, EU, FXE
by: FXstreet

On the back of an upbeat U.S. jobs number last Friday, which led to the cheapest EUR/USD in 7 days, sellers found yet another reason to send the spot rate lower at the start of the week, after Italian PM Mario Monti surprisingly announced on Saturday his intention to resign.

The bombshell has heightened fears of a political crisis in Italy, with early elections in Italy likely to be set in February, shortly after the country's 2013 budget is approved through the parliament, according to Mr. Monti. While projections for a possible electoral result remain uncertain at best, the dreadful scenario being anticipated by some commentators is a fragmented parliament, which may inevitably lead to a coalition government lacking determination to implement key structural reforms.

According to NAB strategists:

Prospects of Italian bond yields spiking higher when Europe opens is driving the euro lower." The bank reminds us, however, that "EUR bears would do well to note that the People of Liberty party currently trails the centre-left Democratic party by 20 points, and the re-appearance of Mr. Berlusconi to the centre of the Italian political stage may well prompt Mr. Monti to make him himself available for re-selection...

Meanwhile, our fundametal team notes:

At this stage, reservations to bid the Euro are high as the mere thought of a Berlusconi comeback would be destructive for the path of austerity taken by Italy under Monti's technocrat supervision, posing a real threat in worsening the country's finances.

On the fiscal cliff, negotiations seem to have taken a more constructive tone, according to CNBC, which notes that

a handful of top Republicans are giving up their opposition to higher tax rates on the rich, signaling possible progress in the fiscal cliff negotiations and adding pressure to conservatives in the House of Representatives.

However, as Adam Button, currency analyst at Forexlive, points out,

unfortunately, the 'top Republicans' are in the Senate not the House, which is where the problem lies." Adam is adamant on the view that eventually, a deal will be inked, but he questions whether or not "it will take a few days of wild 'risk off' trading before Washington gets the message.

The technical tone in the EUR/USD, according to Marc Chandler, Global Head of Currency Strategy,

has been adversely impacted by the euro's cent and a half decline in latter part of last week.

While the recovery of $1.2980 to $1.3000 area would ease pressure for a potential fall towards $1.2840 key support, Marc says,

the euro has been turned back three times now since mid-September above $1.31, with recent price action reinforcing the significance of this area.

The BBH FX strategist sees the EUR/USD consolidating to weaker activity.

On our weekly FX poll, which surveys up to 35 proven FX experts, including top bank's forecasts, the conclusion is that EUR/USD's recent sell-off should not be interpreted as an opportunity to buy as price in the foreseeable future is projected from sideways one week from now to develop an increasingly bearish bias through $1.28 in one month and $1.2625 in one quarter.

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.