Euro Crushed by Italian Election Mess

GBP: Holds Steady in Europe and North America
CAD: Hit by Cautionary Comments from Carney
AUD: RBA Debelle Still Open to Rate Cuts
NZD: Chinese Manufacturing Activity Slows

Sterling suffered modestly on the Moody’s downgrade yesterday, but most of the damage had been done on Friday night in the US. The Moody’s news was not a particular surprise, and can’t be regarded as a new reason to sell sterling, but we are still very short of reasons to buy pounds, and expectations of more QE next month are building and will continue to discourage sterling buyers ahead of next month’s MPC. However, the reversal in the EUR yesterday afternoon makes the 0.8770 level still look like an effective medium term high, but if the EUR tone stays negative the bias lower to GBP/USD will probably be sustained in the short term, and 1.50 can still be broken. We would still expect sellers of GBP/USD near 1.52. For today the CBI sales data will attract some interest, but in practice is a poor guide to retail sales in recent months. There will be more interest in the MPC testimony to the Treasury Select Committee, with Bean and McCafferty seen as possible swing voters on QE.

The primary focus today was the Italian elections. The results are a complete mess. While Bersani appears to have won the lower chamber, Berlusconi may have won enough votes in the Senate to block his win. Even these results are changing by the minute because at the time of publication, there are some headlines that say the comedian Grillo may be leading Bersani in the lower house. This would be the worse case scenario for the euro and Italian finances because it means that we could have a Berlusconi-Grillo led government. If Bersani wins the lower house and Berlusconi wins the Senate, new elections may be needed because the current results could make the country ungovernable and therefore prolonging the uncertainty for the euro. What is clear however is that the Italians have voted against Monti and his austerity measures which the market have applauded. We’re not experts in Italian politics, so we quote the Wall Street Journal here that says “The result is that Italy may, over the next few weeks, try to form a temporary government backed by a grand coalition of left and right-wing forces with the sole aim of changing Italy’s electoral law and then going to a vote again as early as summer. It isn’t clear who would run such a short-lived government.” What we do know is that none of this is good for the euro.

The question today is whether Fed Chairman Ben Bernanke will ease or add to the pain. Unfortunately we can’t see both currency pairs benefitting from Bernanke’s semi-annual testimony. Thanks to the FOMC minutes last week, the U.S. dollar soared against most of the major currencies. The mere possibility that the U.S. central bank could start to taper off its monthly asset purchase program as quickly as next month sent investors rushing to adjust their positions.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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