Italian elections weigh heavily on Europe

Currencies Direct February 27th 2013 - 2 minute read

European markets continued to feel
the pressure of the looming Italian elections as they closed in the
red yesterday, providing strength to the US Dollar. The elections
are at a stalemate with no clear winner and with pretty bleak
prospects of any of the parties finding a common ground to form a
coalition. The gridlock is expected to last for a while, and we may
see a decision prolonged all the way into May when they will go
back into polls. All optimism and consumer confidence in the Euro
markets this year has transformed into a major concern for
investors that the resulting paralysis from a hung parliament could
see economic and fiscal reforms fall behind schedule and send bond
yields back up; which possibly will spread to other peripheral
economies. The bloc’s currency reached to lows of 1.3025 in trade
yesterday but has picked up a little this morning to 1.31 against
the greenback.

From the US, we witnessed Fed
Chairman Ben Bernanke submit his bi-annual report to Congress. His
comments did have a marginally hawkish tone as he continued to
stress that the US does not see the potential costs of increased
risk taking outweighing the benefits of promoting a stronger
economic recovery as he continued to back the current asset
purchases and quantitative easing programme stating they were
supporting the economy with minimal risk to inflation. US figures
also revealed a jump in consumer confidence and better than
expected new home sales which helped to provide some support for US
equities and the US dollar.

With the exaggerated selloff in
Sterling late last week, after the AAA rating downgrade, the pound
has recovered a little bit of its losses against the Euro as it
went back to levels of 1.16 yesterday. However, we have seen a
slight slump in the currency as markets factor in the UK GDP figure
out later this morning expected at -0.3%. Overnight, we had the UK
inflation report after which several Bank of England members
suggested they are open to further quantitative easing even with
the prospects of rising inflation. The deputy governor, Paul Tucker
also hinted that we may see negative interest rates, as he tries to
get banks’ lending more to businesses. Sterling has opened trade
this morning fairly weak at 1.5140 against the greenback.

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Currencies Direct

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