EUR/USD: eyes on Italian constitutional referendum and more political risks for the euro

EUR/USD is the focus at the start of this week given the heightened political risks on a macro scale with European elections and referendums coming to the fore over the next several months and not to mention the ECB, where participants are wary of a hawkish ease.

EU in crisis

Besides, the largest influx of refugees since World War II and terrorist attacks on the increase and prospects of another banking meltdown, of course, we already kicked off with the British EU referendum and vote to leave earlier in the year, then the surprise Trump victory. Well, we now look ahead to the French presidential and legislative elections, the German presidential and parliamentary elections and the Netherlands general election all to come in 2017.

Italian constitutional referendum

However, we start off today with Italian Prime Minister Matteo Renzi's job being on the line due to the Italian constitutional referendum.

There are already reports that the Italians have come out in force to vote today - by midday, 20 % of the 46 million Italians entitled to vote had already done so voting on the PM's Democratic Party's plan to enact a highly ambitious government overhaul and the largest in decades as a bid to end unstable coalition building by stripping the upper house of parliament of the ability to bring down governments. The number of senators would be cut by two-thirds. In accordance with Article 138 of the Constitution, this referendum was called because the constitutional law had not been approved by a qualified majority of two-thirds in each house of parliament in the second vote.

Exit polls will fall in around 2200 GMT and the first provisional results could come in as early as 2300 GMT, midnight in Rome. Reuters have reported that the Prime Minster will speak around 2300 GMT. Renzi has pledged to quit if he loses and the risk there to the euro is that this would seriously benefit yet more anti-establishment movements being the Italian's Five Star Movement that supports a referendum on Italy's euro membership.

Market is split on the greenback

US dollar index ends week lower, retreating modestly from 13-year highs

Meanwhile, the dollar is on the back-foot as were the US 10yr treasury yields that fell from 2.44% to 2.37% on Friday after a slightly disappointing jobs number from the US and the last one before the FOMC meet this month. However, as analysts at Westpac noted, "The data wasn't bad enough to cause markets to back away from a Dec Fed hike view though, Fed funds futures continuing to imply a 100% chance of a rate hike in December, with two more rate hikes priced in for 2017."

US: Jobs numbers supports consumer and FOMC December move - Wells Fargo

Analysts at Brown Brother Harriman said, "Leaving aside the larger and longer-term views, market participants are split over the dollar's near-term outlook," suggested the analysts, adding, "We suggest the near-term price action should be respected, which is to say that the consolidation of the dollar's gains that we anticipated could evolve or morph into an outright correction."

EUR/USD levels

Valeria Bednarik, chief analyst at FXStreet explained, "From a technical point of view, and despite the pair has closed in the green for two consecutive weeks, it's still too early to call for an interim bottom at 1.0571, the low of the year achieved last November, as the recovery has faltered below the 23.6% retracement of its latest daily slide at 1.0700. The market is probably waiting for the ECB, and the FED, next December 14th, before defining some clearer positions in the pair. Daily basis, technical indicators have managed to correct extreme oversold conditions, but lost upward strength within bearish territory, while the price is currently struggling with a bearish 20 DMA, indicating limited buying interest. In the 4 hours chart the price is above a modestly bullish 20 SMA and around a strongly bearish 100 SMA, while technical indicators head slightly higher above their mid-lines, but with no certain momentum. An upward acceleration beyond 1.0700, can favor additional gains up to 1.0815, the 38.2% retracement of the same daily slide, while below 1.0600 the pair may fall further to fresh year low."