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Forex: Euro traders shift gaze to Rome

The EUR/USD, recently marginalized to a 6-week low below 1.32, will try to escape from such depressed levels on this new week of trading. Whether or not a recovery in prices succeeds, the Italian election results will determine the immediate action in the fortune of the Euro.

Ahead of the election results, the pair found some bids ahead of 1.3130 key support while awaiting the resolution of today's Italian election, where the threat of a Berlusconi comeback keeps traders cautious. The ideal scenario seen as Euro supportive would be a government that follows the same line of thinking from current Italian Prime Minister Mario Monti's party.

As noted by Katarzyna Komorowska, FXstreet.com fundamental analyst:

"The frontrunners in the election are the head of the center-left Democratic Party (PD) Pier Luigi Bersani and center-right People of Freedom (PDL) party's leader Silvio Berlusconi. Third in the opinion polls comes the comedian turned populist politician Beppe Grillo an his 5-Star movement (5SM). The current Italian Prime Minister Mario Monti leading the Civic Choice coalition party also takes part in the elections, but is not expected to claim victory, but rather be a 'kingmaker'."

Meanwhile, NAB thinks that "anything other than a clear win for Bersani’s Democratic Party in the lower house and a seemingly workable Bersani/Monti coalition in the Senate (the Senate has equal say on policy matters) will almost inevitably see pressure resurface on euro peripheral debt markets and with that risk that EUR/USD heads further south to as far as 1.30" the bank said.

As Sean Callow, currency strategist at Westpac, notes: "The first exit polls will be released with the closing of voting at 2pm London time (3pm local). EUR/USD should be positively correlated with the performance of frontrunner Bersani (centre-left) and incumbent PM Monti, while a surprise win for spoiler Berlusconi would be taken very negatively."

In a Friday's special report written byMs. Komorowska, she features the chief economist at Maverick Intelligence Megan Green, who suggests in an article for Bloomberg that "the worst choice for the Italian people would be Berlusconi, whose victory would most probably be greeted by financial markets with distrust and would lead to dumping Italian bonds."

"A victory for Bersani’s coalition in both chambers could make the process of making and implementing government decisions faster and easier," Megan added.

Ahead of the Italian results, Valeria Bednarik, chief technical strategist at FXstreet.com, sees "the pair offering little interest at this point", yet she still forebodes risk skewed to the downside, "with a break below 1.3150 being understood as a downside continuation sign" she says. On the upside, a break and hold above 1.3270/1.33 is what it takes to ease the selling pressure.

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