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Italy’s Prime Minister Silvio Berlusconi will meet the president, but doesn’t plan on resigning. He is clinging to power despite not receiving an absolute majority in parliament and after his main coalition partner told him to go. The markets want him out.

Ten year Italian bond yields are once again at a record high of 6.77% in a clear vote of no confidence. Also in the short term, the charts are screaming: 6.38%.

It’s not only the “bond vigilantes” attacking Italy: major European banks are reducing their exposure to the troubled G-7 country.

The lack of an absolute majority in parliament helped EUR/USD climb higher and temporarily breach the to 1.3838 line, but the pair has retreated once again to levels below 1.38.

A departure of Berlusconi may temporarily lift the euro, but this will not be sufficient. Why:

  • There is no significant  successor who can lead the country and convince the markets that Italy is getting back to normal.
  • The ECB currently buys only few bonds, not enough to stop the flooding. The new Italian president of the ECB, Mario Draghi, will find it hard to embark on a full scale QE program.
In any case, these are troubled times for the euro. Support is found at 1.3725, followed by more important support at 1.3650. For more on the pair, see the EUR/USD forecast.

It seems that it is just a matter of time until Berlusconi goes. The market is moving faster than politicians once again.

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