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EUR hit by Italian Elections, Bernanke Delivers Testimony
The inconclusive Italian elections shrank the global risk sentiment. While the majority of Italian voters chose anti-austerity candidates, Mr. Bersani and its allies failed to form a coalition to command the majority of seats in the upper house. EUR saw heavy sell-off over the last 24-hours. In Asia, EURUSD hit 1.3018, while EURJPY slipped more than 6 figures
In US, we are only three days ahead of USD85bn worth sequestration budget cuts, while there are no signs of agreement between Obama and the congressional Republicans yet. Today, Bernanke will give his testimony, where markets expect to hear more details on sequestration and the impacts on the US growth outlook.
Italy against Austerity
The anti-austerity candidates Berlusconi and Grillo scored up to 55% of the public votes, while Bersani and its allies failed to get the control on the majority of the upper house. “This possible outcome would have very heavy consequences for Italy at the European level” said Letta, the deputy head of Bersani’s Democratic Party. ”Based on these projections, more than half of Italians expressed a vote against austerity, against the euro, against Merkel.”
The news out of Italy triggered a heavy EUR unwind. EURUSD slumped to 1.3018 month-low, while EURJPY gave-off 6 figures. The Italian 10-year yield surged by 31%, and the 10-year yield spread between core and periphery widened significantly.
EURUSD broke its 50%-Fibonacci level (1.3089), and crossed down its 100-day MA. The trend momentum indicators remain highly negative. Technically, EUR has more room to the downside, unless the Fed’s Bernanke delivers a dovish testimony today (as we expect). So far, we see EURUSD consolidating its recent drop, yet the single currency remains highly vulnerable.
Bernanke Delivers Testimony
Across-the-board sequestration budget cuts will take action on March 1st, unless an agreement is reached between Obama and the congressional Republicans. The US faces lost jobs and the heavy impact of USD85bn reduction on its already-vulnerable economy. Today, Bernanke will deliver a congressional testimony. We expect Bernanke to comment on two major points. First of all, Bernanke should support the extension of the monetary easing despite the hawk members within FOMC. Second, he should communicate more details on the consequences of an exit from the monetary stimulus program on the US growth and US economy.
According to MSCI, the market value of Fed holdings would shrink by USD 547bn over three years, if the interest rates rise abruptly on the contraction scenario, while Bernanke believe that so far, the QE “may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs relative to what would have occurred.”
The US 10-year Treasury bond yield shrank to 1.8355% from 2% yesterday, while Brent and WTI Crude sold off to 2.3% and 2.7% respectively
JPY and CHF Dipped
The Swiss Franc and Yen were the obvious victims to the risk-aversion trade on the back of the Italian story. Yen and CHF spiked in US session. The Swiss franc rose to-its six-week high against EUR, while EURJPY shrank by 6 figures.
In Japan, the split views on the next BoJ’s election clearly gave more support to Yen. USDJPY is recovering from yesterday’s aggressive sell-off, while Abe-supportive news out of Japan should push the Yen on weaker levels.
2013-02-26T14:00:00 USD Dec US House Price Index m/m, exp. 0.6%, last 0.6%
2013-02-26T15:00:00 USD Feb Richmond Fed Manufacturing Index, exp. -4, last -12
2013-02-26T15:00:00 USD US Feb Consumer Confidence, exp. 62.0, last 58.6
2013-02-26T15:00:00 USD Jan US New Home Sales, exp. 380K. last 369K
2013-02-26T15:00:00 USD Jan US New Home Sales m/m, exp. 3.0%, last -7.3%
Yesterday Italian election forced an all-out, mass exodus from the EUR. EURUSD collapsed yesterday and remains on offer today, bottoming out around the 1.3018 (taking out our bearish target of 1.3047). The pair is approaching critical support at 1.3000 (also daily cloud base) which if broken would indicate an extension of weakness to 1.2878. The next support is located at 1.3000 (4th Jan low), 1.2931 (11th Dec low), 1.2878 (7th Nov reaction high). The first level of resistance remains at 1.3460 (14th Feb high), 1.3578 (7th Feb high), 1.3690 / 1.3710 (27th Sept high) then 1.3868 (9th Dec high).
GBPUSD has been able to climb off the lows (1.5073) due to selling of EURGBP. Despite the mild recovery rally, dominate bearish trend conditions persist. Currently indictors are slightly overstretched which could extended the rally, however any buying will likely be short lived. Unlike the Fed, expectation for the BoE is more QE which should equal further erosion in GBP. The support levels from here are thin below with 1.5065 (25th Feb low), then 1.4950 (8th July 10’ low). Watch for next resistance to come into play at 1.5527 (22nd Feb high), 1.5689 (13th Feb high), 1.5850 (8th Feb high), 1.5891 (200d MA & 21st Jan high), 1.6007 (18th Jan high), 1.5921 (200d MA), 1.6180 (10th Jan high), 1.6340 (2nd Jan high) and 1.6454 (29th Aug ’11 top).
USDJPY has aggressively sold-off from a high of 94.56 to 90.88 low. While the bearish reversal was sharp, downside support at 91.22 held. Currently the pair is consolidated loses slightly above horizontal support but trend and momentum indicators warning of further downside risks towards 90.00. However, we need a clear break of 91.22 before any extension of current weakness. On the downside, support is eyed at 90.00 (18th Jan top), 89.35 (11th Jan high), 88.10 (23rd Jan low), 87.60 (16th Jan low), 86.64 (27th Dec high), 85.54 (5th April high), 84.23 (15th March high) 81.50/69 (15th Nov. high & 28th Nov. low), 81.00 (16th April pivot), 79.06 (9th Nov low), then 78.75 (8th Oct high). Above us, minor resistance remains 92.80 (21d MA), 93.80 (13th Feb high), 94.98 (6th May high) 95.00 (psychological level), 96.00 (11th June), then 97.75 (7th Aug high).
USDCHF has rallied back to 0.9339. MACD has now settled above the zero line indicating the bullish trend could further resume near term. As the pair was finally able to break above resistance around 0.9293, should open the path to further extension to 0.9385. The next levels of resistance are located 0.9385 (18th Jan high), 0.9457 (21st Sept high), 0.9515 (13th Nov high & uptrend top), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance). The first levels of support remains at 0.9180 (21d MA), 0.9085 (20th Dec low) , 0.9041 (1st May low) then 0.8928 (Feb 12’ low).