EUR/USD Dec. 10 – Under Pressure as Italian PM resigns

EUR/USD  was steady at the start of the new trading week, following sharp losses late last week. The euro is under pressure as Italian Prime Minister Mario Monti said that he plans to resign. The markets are concerned that the  political  uncertainty in Italy could exacerbate the country’s difficult economic situation. There was more bad news as the  German Bundesbank released a forecast predicting lower growth in  Germany in 2013. In economic news, Friday’s US employment numbers were solid. Non-Farm Employment Change dropped in November, but was well above the forecast. As well, the unemployment rate dropped to 7.7%, its lowest level since  February  2009. In European releases, Italian and French Industrial Production disappointed, falling well below the estimates. There are no scheduled releases out of the US today.

EUR/USD Technical

• Asian session: Euro/dollar was quiet, as the pair consolidated at 1.2895. The pair  has crossed above the 1.29 line in the  European session.
• Current range: 1.2880 to 1.2960.

Further levels in both directions:    

• Below: 1.2880, 1.28, 1.2750, 1.2690, 1.2624, 1.2590, 1.25, 1.2440, 1.2390 and 1.2250.
• Above: 1.2960, 1.30, 1.3030, 1.3080, 1.3130, 1.3170, 1.3290 and 1.34.
• 1.2880 is providing weak  support as the pair tests 1.29. 1.28 is stronger.
• 1.2960 is the next line on upside.

Euro/dollar under pressure as Italian PM resigns- click on the graph to enlarge.

EUR/USD Fundamentals

• 7:00 German Trade Balance. Exp. +15.9B. Actual +15.2B.
• 7:45 French Industrial Production. Exp. 0.4%. Actual -0.7%.
• 9:00  Italian Industrial Production. Exp. -0.2%. Actual -1.1%.
• 9:30  Sentix Investor Confidence. Exp. -16.2 points.Actual 16.8 points.

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

EUR/USD Sentiment

• Italian PM Monti to resign: There were dramatic events in Italy over the weekend, as Prime Minister Mario Monti announced that he will resign shortly,  after losing the support of former  Prime Minister Silvio Berlusconi’s party. The move means that Italians will head to the polls early next year. The Italian economy is in recession, and the political drama puts further pressure on the shaky euro. Immediately following the announcement, Standard & Poor’s wasted no time in issuing a statement  that it was concerned whether  the new Italian government would continue to practice austerity, and warned that it could lower Italy’s credit rating if the  economy does not improve in 2013.
• Bundesbank  lowers German Growth Forecast:  The euro took a tumble last week after the ECB issued a bleak assessment of Euro-zone growth.  On Friday, the  German Bundesbank followed suit, as it revised downwards its forecast of growth in the Euro-zone’s largest economy. The powerful central bank said that it expects German GDP to expand  just 0.7%  this year and  a negligible 0.4% in  2013. Back in June, the Bundesbank  predicted growth of 1%  in 2012 and 1.6%  in 2013. On a positive note,  the  report  stated that  2014 should see much stronger growth.
• ECB maintains key interest rate: Asa expected, the ECB maintained its key interest rate at 0.75%. The rate has been pegged at this record-low level since June. However, this time around, ECB President Mario Draghi noted that the vote was not unanimous. Draghi alluded to a wide discussion on the issue, and stated that a consensus was reached to maintain the current level. This remark also contributed to negative market sentiment, and hurt the euro. Clearly, the ECB is alarmed by the state of the euro-zone economy, and there is room for a further rate cut early in 2013 if the situation does not improve.
• Greece launches buy-back of debt: Greece has offered to purchase 10 billion euros of its national debt, as part of the new bailout agreement aimed at resolving the country’s severe debt crisis. Market sentiment was positive after the Greek government offered a premium on markets prices for Greek bonds. The EUR 10 billion buy-back could allow Greece to retire up to EUR 30 billion worth of debt. Greece is expecting the next installment of aid on December 13, and the buy-back is scheduled to be completed by December 17. German Chancellor Angela Merkel hinted that Berlin could consider a write-off of its Greek loans. Until now, Germany has strenuously objected to a write-off of Greek debt, but may have to show more flexibility if Greece is to regain its financial footing. However, Merkel is unlikely to agree to a debt haircut, in any shape or form, prior to German elections in 2013.
• US lawmakers bicker as fiscal cliff negotiations continue: Republicans and Democrats continue to battle hard over the looming fiscal cliff crisis. The Democrat proposal calls for $1.6 trillion in additional taxes over the next 10 years, with higher taxes on those earning over $250,000. The Republicans have offered $800 billion in new tax revenue from spending cuts and overhauling the tax code. However, the Republicans are split on whether to agree to higher income tax rates, and the Democrats, led by President Obama, could take advantage of the disarray in the Republican camp.   The markets are hoping that the politicians will find a compromise and avoid a crisis which could threaten the fragile US recovery. Both parties are likely to continue talking tough for a while yet, as the fiscal cliff clock keeps ticking.