EUR/USD
The pair settled higher on Wednesday, in part benefiting from the latest BTP auctions by the Italian Treasury which, in spite of the unstable political situation were well covered. Nevertheless, there is a risk that further bond yield spread widening in Europe, on the back of concerns regarding the political instability in Italy, may see the pair break through the key 1.3000 level to the downside. Key support level is seen at 1.2998, which once broken opens the door towards 1.2877 which is the mid- point of the July 2012 to February 2013 advance. The most likely outcome in Italy seems to be a caretaker government. However there is a risk that it will take weeks and potentially months to reach some sort of compromise which may just stifle any confidence left and lead to another speculative attack. As a reminder, Bersani called on all his opponents yesterday, including the much despised Berlusconi, to back a five-point programme of political reform, easing of austerity and job promotion. Of note, S&P and Moody’s released statements overnight commenting that while there is no change in Italy’s BBB+/Baa2 credit ratings just yet, the elections have underscored that risks to carrying out structural and fiscal reforms are substantial.
GBP/USD
The pair settled the session higher as market participants remained vary of potential escalation of the Eurozone sovereign debt crisis amid the instability in Italy and sought to diversify exposure to the joint currency bloc. In terms of UK related commentary, although the ONS in the UK left its estimate for the Q4 unchanged at -0.3%, the agency said that growth in the Q3 was 1% rather than 0.9% and that the economy shrank in the Q1 of 2012 not by 0.2% but by just 0.1%. The changes pushed up the ONS estimate for annual 2012 growth from zero to 0.2%. BoE’s Bean said that discussions about charging banks to deposit money were "blue-sky thinking" and the Bank had no plan to introduce negative interest rates now. As a reminder, BoE’s Tucker said on Tuesday that the central bank was considering whether negative interest rates were a feasible way to boost the economy. In terms of technical levels, supports are seen at 1.5033, 1.4949 and then at 1.4873. On the other hand, resistance levels are seen at the 10DMA line at 1.5296, 1.5330 and then at 1.5452.
USD/JPY
The pair settled lower as risk-averse flows stemming the ongoing instability in Italy buoyed demand for safe-have assets. While the DPJ signalled resistance to one anticipated deputy pick, Iwata, an advocate of greater government oversight of the BOJ, two other opposition parties showed support, increasing the chance that Abe gets approval for his full slate. Despite the latest setback, the price action for USD/JPY remains in a bullish trend. However the bias may swing should the pair break through the 62% retracement of the Jan-23 to Feb-25th advance at 90.62.
