EUR/US Feb 27 – Steady as Italy Grapples with Political

EUR/USD has leveled off following the volatility which resulted after election results in Italy pointed to a political deadlock. With no party in control of the Senate, there are fears that a prolonged deadlock could lead to a new crisis in the Eurozone. The markets will be monitoring Wednesday’s 10-year Italian Bond Auction, which could be an important indicator of investor sentiment on the heels of the Italian election. In the Eurozone, GfK  German  Consumer Climate fell within expectations, and  M3 Money Supply  beat  the estimate.  In the US, New Home Sales and Consumer Confidence both  sparkled. There are two more key economic releases today – Core Durable Goods Orders and Pending Home Sales. As well, Fed Chairman Bernard Bernanke  continues to brief lawmakers  on Capitol Hill.

Here is a quick update on the technical situation, indicators, and market sentiment that moves euro/dollar.

EUR/USD Technical

• Asian session: Euro/dollar was quiet, as the pair touched a high of 1.3091, before consolidating at 1.3079. The pair is unchanged in the European session.
• Current range: 1.3030 to 1.3110.

Further levels in both directions:    

• Below: 1.3030, 1.30, 1.2960, 1.2812 and 1.2758.
• Above: 1.3110, 1.3130, 1.3170, 1.3255, 1.3290, 1.3360, 1.34 and 1.3486.
• 1.3030  continues to  provide support.
• On the upside, 1.3110 is a weak resistance line. 1,3170 is stronger.

Euro/dollar  steady as markets digest Italian election results  – click on the graph to enlarge.

EUR/USD Fundamentals

• 7:00 GfK German Consumer Climate. Exp. 5.9 points. Actual 5.9 points.
• 7:00 GfK German Import Prices. Exp. 0.5%. Actual 0.1%.
• 9:00 Eurozone M3 Money Supply. Exp. 3.2%. Actual 3.5%.
• 9:00 Eurozone Private Loans. Exp. -0.6%. Actual -0.9%.
• 9:10 Eurozone Retail PMI. Actual 44.5 points.
• Tentative: Italian 10-year Bond Auction.
• 13:30 US Core Durable Goods Orders. Exp. 0.3%.
• 13:30 US Durable Goods Orders. Exp. -4.8%.
• 15:00 US Fed Chairman Bernard Bernanke Speaks. Bernanke will testify on the Semiannual Monetary Policy Report before the  House Financial Services  Committee.
• 15:00 US  Pending Home Sales. Exp. 1.7%.
• 15:30 US Crude Oil Inventories. Exp. 2.4M.
• 17:30 ECB President Mario Draghi Speaks.

For more events and lines, see the Euro to dollar forecast

EUR/USD Sentiment

• Italian election produces political stalemate: Elections in Italy are traditionally  boisterous affairs, but even Italians were shocked by the results of the  parlimentary election.  The 5-Star Movement, which was largely a protest movement that was dubbed a “non-party”, shocked pundits by garnering more votes than any other single party. The Center-left bloc, headed by Pier Luigi Bersani, will have a majority in the lower house of parliament, but there is a near-split in the upper house. This leaves the country in a political deadlock, as any coalition must have a majority in both houses. Prime Minister Monti’s centrist bloc fared poorly at the polls, reflecting widespread voter dissatisfaction with Monti’s tough austerity measures. The inconclusive results were a worst-case scenario for the markets, which  were rattled  by the news. The euro shed more than a cent on Monday, but has since steadied.
• Eurozone  politicians react to Italian elections: The shock of the results of parliamentary elections in Italy  quickly spread beyond Italy, as Eurozone officials scrambled to  put  a brave face on the surprise results. German Foreign Minister Guido Westerwelle urged Italy to form a stable government as  quickly  as possible. Westerwelle noted that the  entire Eurozone was “in the same boat” with regard to the debt crisis. French Finance Minister Pierre Moscovici stated that the results did not threaten stability in the Eurozone, but at the same time, it was essential that Italy gets its act together and form a new government. However,  Spain’s foreign minister, Jose Garcia-Margallo  did not hide  his pessimism, warning that the election results  could  have dire consequences for both Italy and Europe.
• Bernanke says Fed will hold course: On Tuesday, Fed Chair Bernard Bernanke testified before the US Senate Banking Committee, and sought to reassure the markets that the Fed was intent on continuing the current round of QE. There had been some speculation after the release of minutes from the most recent policy meeting, that the Fed was considering winding down QE, but Bernanke stated that Fed was likely to  continue with QE and ultra-low interest rates. Bernanke will testify before the House of Representatives on Wednesday, and the markets will be listening carefully, but are not expecting any dramatic new developments.
• US numbers sparkle: Largely overshadowed by the dramatic developments in Italy, Tuesday’s US releases were outstanding. CB Consumer Confidence hit 69.6 points, crushing the estimate of 60.8 points. New Home Sales also shone, jumping to 437 thousand. The market estimate stood at 381K. There was also good news on the manufacturing front, as the Richmond Manufacturing Index hit 6 points, easily beating the forecast of -4. On Wednesday, the US will release additional housing and manufacturing numbers. If the indicators can repeat Tuesday’s performance, we could see some impact on EUR/USD.