EUR/USD – Euro Under Pressure as Italy Could Face New Elections

EUR/USD is steady in Tuesday trading, as the pair trades in the mid-1.30 range. The markets are nervous about the continuing political crisis in Italy, and the stalemate could lead to new elections later this year. In Tuesday’s fundamental releases, Spanish Services PMI disappointed, falling below expectations. Italian Services PMI came in as forecast, while Eurozone Final PMI managed to beat the forecast. Eurozone Retail Sales was stellar, posting its sharpest gain in over four years. beat the estimate. In the US, today’s highlight is ISM Non-Manufacturing PMI.

The markets took a time-out from the bewildering political situation in Italy and focused on some Eurozone data on Tuesday. In PMI releases, Spanish Services PMI came in at 44.7 points, well below the estimate of 45.9. Italian Services PMI was almost unchanged at 43.6 points, matching the forecast. Eurozone Final Services fell in February to 47.9 points, but this was still above the estimate of 47.3 points. There was some excellent news from Eurozone Retail Sales, however. The indicator jumped 1.2%, easily beating the estimate of 0.3%. The robust gain was particularly encouraging, as it was the highest rise since July 2008. 

The political crisis in Italy shows no sign of abating anytime soon. The leader of the Center-left bloc, Pier Luigi Bersani, urged the leader of the 5-Star Movement, Beppe Grillo, to support a new government or agree to new elections. So far, 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 dysfunctional electoral system. Meanwhile, Grillo suggested that Italy hold a referendum on whether to remain in the Eurozone. Italy is facing ac crushing debt of two trillion euros, and Grillo has called for the country to renegotiate terms. 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 thanks to a huge protest vote, would prefer returning to the polls rather than forming a coalition with the established parties.

Back in the US, Janet Yellen, vice-chair of the US Federal Reserve, underscored the Federal Reserve’s intent to continue its current QE program and ultra-low interest rates. Yellen said that she hoped that the low interest rates would facilitate a “return to prudent risk-taking”. The 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 argued 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, where he also defended the Fed’s monetary policy.

EUR/USD for Tuesday, March 5, 2013

EUR/USD March 5 at 11:00 GMT

1.3032 H: 1.3076 L: 1.3016

EUR/USD Technical

EUR/USD is not showing much activity in Tuesday trading, and the proximate support and resistance lines remain in place (S1 and R1 above). The pair is receiving support at the round number of 1.30. This line is a weak one, and the pair has already tried to break through this psychologically important level. There is stronger support at 1.2950. On the upside, there is resistance at 1.3080. This line could see activity if the euro shows any upward momentum. The next line of resistance is at 1.3130.

Current range: 1.3000 to 1.3080.

Further levels in both directions:

• Below: 1.3000, 1.2950, 1.2882 and 1.2802
• Above: 1.3080, 1.3130, 1.3170, 1.3280, 1.3350 and 1.34

OANDA’s Open Position Ratios

The EUR/USD ratio is very quiet in Tuesday trading. This is reflected in the current activity of the pair, which has also been subdued. Given the fluid situation in Italy, the lack of activity is unlikely to continue for a long period of time, and traders should monitor the ratio for any signs of movement.

The euro remains under pressure, but so far has managed to remain above the all-important 1.30 level. Will the euro stay steady, or will we see rates below 1.30? The political deadlock in Italy shows no signs of abating, and new elections remain a strong possibility. We can expect this crisis to continue to weigh on the euro.

EUR/USD Fundamentals

• 8:15 Spanish Services PMI. Estimate 45.9 points. Actual 44.7 points.
• 8:45 Italian Services PMI. Estimate 43.6. points. Actual 43.6 points.
• 9:00 Eurozone Final Services PMI. Estimate 47.3 points. Actual 47.9 points.
• All Day: ECOFIN Meetings in Brussels.
• 10:00 Eurozone Retail Sales. Estimate 0.3%. Actual 1.2%.
• 15:00 US ISM Non-Manufacturing PMI. Estimate 55.0 points.
• 15:00 US IBD/TIPP Economic Optimism. Estimate 47.8 points.

*Key releases are highlighted in bold

*All release times are GMT

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