Euro tumbles following the Italian election

Currencies Direct February 26th 2013 - 2 minute read

In an explosive day for FX markets,
the single European currency was the worst performer of the majors.
At the start of the session, the Euro opened the week on a fairly
solid start, but that quickly faded as headlines grew on the
Italian election. The initial Euro rally was a reaction to a solid
win for a pro-austerity, pro-euro Nicos Anastasiades as the Cypriot
president. Although not a resolution to the issues the small
island-nation faces it does relieve it as an instant danger.

Next on the agenda is the far-more
critical Italian election. The likelihood of a clear victory for an
individual party never really seemed to develop but there was some
cautious expectation that a pro-euro coalition could be created.
Early counts proved that would not be possible and led to a no
clear winner which forces either a grand coalition or a
re-election. Additionally, the anti-austerity groups appeared to
gain significant momentum – voters clearly displaying their
frustration over a deepening recession. A full resolution to
Italy’s election issues may not be resolved up for a few weeks. In
the meantime, speculators will start to worry over the renewed fear
of fiscal tension in the Euro-area will do to bond yields. If the
debt markets dry up, the ECB may have to reverse its contracting
balance sheet.

Cable opened the week with a
prominent, 34-pip gap to the downside. Other sterling-based crosses
produced bigger discrepancies during the on the opening of official
trade yesterday. The piercing move lower was the first chance for
many to respond to the Moody’s rating agency’s downgrade of the
United Kingdom’s AAA-rating late Friday evening. This downgrade
certainly dents Prime Minister Cameron’s effort to balance his
austerity push while warding off recession.

Today we should note an Italian
bond auction in the early morning session where €8.75bln of 6 month
debt is on offer and this afternoon we have US Consumer confidence
for the month of February where a reading of 62 is expected.
Sterling could dominate the headlines tomorrow morning with a GDP
number due tomorrow morning expected to show 0% YOY and -0.3% for
the for the Quarter.

Written by
Currencies Direct

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