EUR/USD – Steady but Italy Worries Continue

EUR/USD is steady, but remains under pressure, as the pair struggles to stay above the all-important 1.30 level. The markets are nervous about the political vacuum in Italy, and the stalemate could lead to new elections later this year. In Tuesday’s economic releases, Spanish Services PMI disappointed, falling below expectations. Italian Services PMI came in as forecast, while Eurozone Final Services PMI dropped  but still   beat the estimate. The markets are waiting for the release of Eurozone Retail Sales later today. Today’s highlight is US ISM Non-Manufacturing PMI.

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 consolidated at 1.3033. The pair has edged higher in the European session.
• Current range: 1.3030 to 1.3100.

Further levels in both directions:  

• Below: 1.3030, 1.3000, 1.2960, 1.2880, 1.2805, 1.2746, 1.27 and 1.2660.
• Above: 1.3100, 1.3130, 1.3170, 1.3255, 1.3290, 1.3350, 1.34 and 1.3486.
• 1.3030  is providing weak support,  giving the round  number of 1.30 a bit of breathing room.
• On the upside, the pair faces resistance at 1.3100. 1.3170 is a key line of resistance.

Euro/dollar  edges higher  – click on the graph to enlarge.

EUR/USD Fundamentals

• 8:15 Spanish Services PMI. Exp. 45.9 points. Actual 44.7 points.
• 8:45  Italian Services PMI. Exp. 43.6. points. Actual 43.6 points.
• 9:00 Eurozone Final Services PMI. Exp. 47.3 points. Actual 47.9 points.
• All Day: ECOFIN Meetings in Brussels.
• 10:00 Eurozone Retail Sales. Exp.  0.3%.
• 15:00 US ISM Non-Manufacturing PMI. Exp. 55.0 points.
• 15:00 US IBD/TIPP Economic Optimism. Exp. 47.8 points.

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

EUR/USD Sentiment

• Italian Crisis Deepens:  The political stalemate in Italy shows no sign of abating anytime soon. Center-left leader Pier Luigi Bersani urged the leader of the 5-Star Movement, Beppe Grillo, to support a new government or agree to new elections. Grillo has refused to throw his support behind any other party, resulting in a political deadlock that threatens to paralyze the Eurozone’s third largest economy. Grillo, a former comedian, has not minced his disdain for the established political leaders, and called Bersani a “dead man walking”. The stalemate could force new elections in a country weary from a sluggish economy, a staggering debt and a dyfunctional electoral system.
• Grillo proposes referendum on euro:   Beppe Grillo, head of Italy’s Five Star Movement, was in the weekend headlines after suggesting that Italy hold a referendum on whether to remain in the Eurozone. Italy’s is staggering under a debt of two trillion euros, and Grillo has called for the country to renegotiate the debt. Grillo, who led his party to a stunning showing in last week’s election, can now play kingmaker in any coalition talks, and his rhetoric  attacking the euro and harsh spending cuts  can no longer be dismissed. Many analysts believe that Grillo, who has risen to political prominence on a huge protest vote, would prefer returning to the polls rather than forming a coalition with the established parties.
• US faces another fiscal crisis:  Remember the fiscal cliff crisis just a few months ago?  This time the budget crisis is called “sequestration”, which saw $85 billion in automatic spending cuts kick in on Friday, as the Democrats and Republicans failed to reach agreement and were quick to point fingers at each other for the impasse. The core issues, spending cuts and tax reforms, continue to divide US lawmakers along party lines. Republicans want to take the axe to social programs such as Medicaide, while Democrats insists on tax hikes as part of any deficit reduction plan. The negotiations, and the  mutual finger pointing of blame and bad will, are set to continue on Capitol Hill.
• Eurozone officials nervous about Italy stalemate: 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 surprising 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, and cooperation between the Eurozone members was essential. French Finance Minister Pierre Moscovici tried to sound reassuring, stating 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. The election has rattled markets worldwide, and the shaky euro could take a tumble if a fractured Italy doesn’t get its act together in a hurry.
• Yellen support Fed stimulus package: Janet Yellen, vice-chair of the US Federal Reserve, threw her support behind the Fed’s current QE program and ultra-low interest rates. Yellen, the No. 2 figure at the Fed, said that she hoped that the low interest rates would facilitate a “return to prudent risk-taking”. The Fed’s  current round of QE involves the purchase of $85 billion in assets each month, and critics have expressed the fear that this could lead to “asset bubbles”. However, both Fed Chair Bernanke and Yellen have stated that the benefits of a stronger recovery outweigh any such risks. Defending the Fed’s asset purchases, Yellen cited a study which found that when the central bank purchases $500 billion in bonds, unemployment drops a quarter of a percentage point within three years. Yellen’s remarks come on the heels of Beranke’s testimony on Capitol Hill, and underscore the Fed’s commitment to  its current monetary policy.