They note that the euro has continued to correct lower over the past week moving back into line with short-term fundamentals after overshooting earlier in the month. They see that the currency has been undermined by leading indicators signalling that the Eurozone economy likely remained in recession in Q1. More worryingly, they note that there is little evidence yet that the sharp improvement in financial market conditions is feeding through to the real Eurozone economy outside of Germany, leading to record divergences in growth between members. Further they add that the euro is also being undermined by heightened uncertainty ahead of the upcoming Italian election.
They continue to flag that the rising popularity of former PM Berlusconi´s centre right party has increased the risk of a more unstable election outcome. They write, “The most favourable outcome for the euro would be the formation of a coalition government between the centre-left and centrist parties who remain committed to fiscal and economic reforms. The EUR/USD cross is also being dragged lower by a stronger US dollar following the release of the latest FOMC minutes which have prompted investors’ to pare back expectations for the duration and size of QE3.”
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