EUR Consolidates ahead of Italian Election Results

Forex News and Events:

The week started with choppy risk sentiment on the back of the UK downgrade, the Italian elections and the crowded news on the BoJ’s next Governor announcement. So far, JPY extended its weakness, EUR consolidated last week’s losses, and surprisingly, GBP rebounded from Friday’s heavy sell-off on some profit taking.

Today, the key event is the Italian elections ending at 14:00 GMT. The early estimates seem to favor Bersani, however historically the first exit polls were quite unreliable.

UK Downgraded

Late on Friday, Moody’s downgraded UK’s domestic and foreign currency sovereign credit rating from Aaa to Aa1, as the economic weakness is expected to broaden in the mid-run. GBP dipped to 1.5073 in late NY trading session. Surprisingly, sterling opened the week by light consolidation.

GBPUSD crossed over 1.5100, and managed to extend gains to 1.5163 due to some light profit taking.
However, the current levels remain under the lower BB, while the RSI signals that the pair is oversold at 22.8%. The bearish trend keeps strengthening according to our average directional index rating. The offers are suspected around 1.5140/50 area. We keep our bearish view on GBP, on the back of the weak fundamentals and the dovish BoE. The overall GBP-weakness is reinforced by the hawkish Fed, yet some macro profit taking is seen ahead 1.50.

Italian Elections

The Italian voting polls will close at 14:00 GMT, while the first unofficial results already started to show up. Historically, the first exit polls on Italian elections have been unreliable, yet we expect a decent level of EUR swings as news fall in.

The centre-left Democrates are expected to gain the majority of seats in Chamber of Deputies. If this is not the case, the markets will be nervous on a divided government to manage the massive public debt, currently exceeding 120% of GDP.

EURUSD tested 1.3250, its three-day high. The pair remains over the 100-day MA, while the momentum indicators signals deeper correction into the bearish zone. The year-to-date implied volatility shows a nice “higher highs and higher lows” pattern. The high speculative volumes saw little decrease last week according to CFTC data. The speculative positions on EUR-trading remain clearly high. The early EUR-rally’s future is in Italy’s hands for the day.

Fed to Taper the Asset Purchases?

The noise on the hawkish FOMC minutes has not calmed yet, but another important deadline is right ahead of US. While Fed continues to buy USD85bn worth mortgage bonds and treasuries per month, the “hawkish-club” among the FOMC members keeps widening, ahead of the sequester budget cuts deadline on March 1st. If no action is taken against, the automatic spending cuts are expected to harm the Americans, breaking down jobs and services in each state. The US 10-year sovereign bonds yield came under 1.97. Maybe Bernanke is right being concerned about the “too-early” timing on asset purchases tapering.

Today's Key Issues (time in GMT):

2013-02-25T13:30:00 USD Jan Chicago Fed Nat Activity Index, last 0.02
2013-02-25T15:30:00 USD Feb Dallas Fed Manif. Activity, exp. 3.0, last 5.5

The Risk Today:

EURUSD Today, EURUSD fate will be decided in Italy. EURUSD has rally marginally at the start of this trading week up it 1.3237 but uncertainty around the Italian election results should keep upside capped. With momentum indicators suggesting a deeper correction into bearish territory and short term downtrend still in play, the next logical targets on the downside is likely to be 1.3047 but first need a clean break of current support. There is considerable risks on the horizon for the single currency. The next support is located at 1.3160 (21st Feb low), 1.3047 (10th 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 GBPUSD immediately sold-off to 1.5162 on the back of Moody's downgrade (but interestingly no collapse), but since demand has slowly crept in. 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 1.5073 (25th Feb low), then 1.4950 (8th July 10’ low). Watch for next resistance to come into play at 1.5553 (15th 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 USDJPY has gapped higher on the open as reports of a dovish BoJ president and outlook of easier Japanese monetary policy sent the yen lower. Any pullbacks would be support by the 21d MA at 92.63 and chance to reload long positions for an extension of broader bull trend to 95.00 then 96.00.
Above us, minor resistance remains 93.80 (13th Feb high), 94.98 (6th May high) 95.00 (psychological level), 96.00 (11th June), then 97.75 (7th Aug high). On the downside, support is eyed at 92.63 (21d MA), 91.93 (5th Feb low), 91.00 / 22 (25th Jan base 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).

USDCHF USDCHF has rallied to 0.9321 peak but since has mildly dipped lower. MACD is looking to settle above the zero line suggesting the bullish trend could resume near term. As the pair was finally able to break above resistance around 0.9293 the move should opened 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).

Resistance and Support: