Euro Poised To Breach $1.3000, Capisci?

Includes: ERO, EU, FXE, UDN, UUP
by: FXstreet

Markets are still debating the aftermath of the unexpected results from the parliamentary elections in Italy. The discomfort is characterized by a generalized weakness in the European bourses, Italian and Spanish benchmark bond yields ticking higher and EUR/USD meandering around $1.3020/$1.3100 within a clear downside bias.

… Politicos are back

The euro came out weaker after the first near-term hurdle just passed, while further selling interest may be lying ahead, as the so-called U.S. 'sequester' is meant to kick in on Friday, representing the second tough hurdle.

The renewed specter of ungovernability in the Italian peninsula promises to be very difficult to allay this time, as the heterogeneity of opinions and parties pro-euro and against the single currency look set to stir a cocktail of unforeseeable consequences, both for the domestic economy and for the bloc as a whole. It would be a mistake to forget that Italy represents not only the third largest economy of the euro area behind Germany and France, but also the most indebted one. A priori, it seems that new elections would be the best-case scenario, but late reluctance to accept this fact by political leaders is actually ruling out this alternative.

So, in a quick glance, former differences between Italy and Germany, for instance, would now be not only regurgitated but also exacerbated. Former commitments of further austerity measures implemented by the technocrat government of Mario Monti - who finished in fourth place - would now be put on 'stand-by' mode or 'forgotten'.

The 'punishment vote' demonstrated once more its power among Italians, in spite of bringing Silvio Berlusconi back on the limelight, and once more it has spoken against market consensus. Italy - and its future as a member of the euro bloc - has now become a big question mark for the global markets, and its cumulus of uncertainties would surely hit investors' confidence, with a more severe impact on the shared currency.

The bloc currency is now trading around $1.3050/80, where sits the 38.2% Fibonacci retracement of the move up from last summer, and trading closer to the interim support at $1.2998, this year's lows. Further selling interest would find the area around $1.2880/95, where the 200-day moving average and the 50% retracement converge, ahead of $1.2660/85, home of the 61.8% retracement and November lows.
Alternatively, the near-term resistance is located at $1.3150 (100-day moving average) ahead of the 7-month uptrend in the vicinity of the $1.3300 figure.

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