EUR set to follow Italian bonds

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The overnight markets seemed to bring a bit of calm to the EUR after the last few days of overall selling frenzy. The markets continue with their concern over a lengthy period of political uncertainty in Italy as the election results pose substantial risks to structural and fiscal reforms.

There was a rumor earlier of a possible alliance between Beppe Grillo’s 5-Star movement and Pier Luigi’s Democratic Party. This would be a definite anti-austerity mix and might prompt the ratings agencies to downgrade Italy. According to analysts, today’s bond auction result will go a long way towards determining the value of EUR going forward. Traders believe a correlation exists between the performance of the bond auction today and the EUR. It will be interesting to see if the EUR can build a base above 1.3000, or it we move into a new 1.25-1.30 range. Traders are nervous to say the least.

Update: EUR remains under pressure after Italian Bond auction

The EUR remained in a tight trading range overnight, testing support at 1.3040 early, before rebounding back towards the 1.3100 resistance area. It is trading at 1.3075-80 as I write this at 4;30 am. The bond auction in Italy will determine the EUR direction in the next few hours. A break above 1.3100 could see a quicker move towards 1.3150 as markets remain overly short.

Forex Analysis: EUR/USD Approaches Head-and-Shoulders Downside Target

Yesterday’s appearance by FED Chair Ben Bernanke before the Senate Banking Committee provided no surprises. The Chairman continued to support the QE measures and stated that “in the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear”. He did not mention the possibility of reducing monetary easing, but his comments were what was expected and had very little if any effect on the currency markets.

In Japan, the news agencies are reporting that PM Abe will make the formal nomination of Asian Development Bank President Haruhiko Kuroda as the next Bank of Japan governor. It is expected that Kuroda will pursue aggressive monetary easing when he takes office in March. Analysts expect some “eye catching announcements” at the April BOJ meeting. As the markets moved toward “risk off” trades late last week and early this week, the JPY was a major benefactor as USD/JPY has fallen from the mid 94.00 level into the mid 91.00 area.

As i said earlier, Italy’s bonds guide the markets today. Traders will continue to monitor the political situation to see if there is any political agreements. Failure on either or both of these will put renewed pressure on the EUR.

A pullback s expected at some point and I would bot be surprised to see it happen today. A test of 1.3150 is not out of the question.

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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