• Italian political developments continue to drive EUR.
• Markets remain nervous over a possible re-election in Italy.
The EUR/USD pair extended its sharp retracement slide from an intraday high level of 1.1728 and tumbled to fresh 6-1/2 month lows in the last hour.
The pair witnessed a dramatic turnaround at the start of a new trading week, with the incoming Italian political uncertainty turning out to be a key driver of the sentiment surrounding the shared currency.
The early euphoria move, led by optimism over a failed attempt by Euro-skeptic parties to form a coalition government in Italy, quickly ran out of steam amid uncertainty over a possible early election.
Investors now feared that another fresh election is coming and there isn't anything that Italian President Mattarella might be able to do to stop a Five Star-Lega government from being formed.
Market nervousness is evident from a sharp spike in Italian bond yields, which in turn is weighing heavily on Italian assets and negatively impacting the sentiment.
The pair dropped to an intraday low level of 1.1639, albeit the selling pressure seems to have abated a bit after Italy President Mattarella gave a mandate to Cottarelli to form a government ahead of a fresh election.
Technical levels to watch
The 1.1670-75 region might now act as an immediate resistance, above which the pair could move back above the 1.1700 handle and aim towards retesting the 1.1730 supply zone. On the flip side, a follow-through selling pressure has the potential to continue dragging the pair further towards its next major support near the 1.1610-1.1600 region.
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