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Forex Flash: Italian elections scenarios and their impact on the euro - Commerzbank

On Friday, the German ifo index upside surprised underlined that at least the German economy will probably continue to recover, but ECB's announcement that the European banks would only be repaying EUR 61.1B from the second 3-year tender (at the first opportunity to repay funds for the first 3-year tender the banks had repaid EUR 137bn.) sent the EUR/USD below the 1.32 mark.

“The fantasy that the ECB will be able to become less expansionary quite quickly has been considerably tarnished”, said analyst Carolin Hecht, stating that “a major factor for the reserve regarding the repayment of the LTRO liquidity is likely to be the uncertainty surrounding the outcome of the Italian parliamentary elections which started yesterday”. There are huge concerns that Silvio Berlusconi becomes the surprise winner of the election: “A Berlusconi victory in both chambers – the chamber of deputies and in the Senate – would constitute the worst case scenario for the euro, which we only consider to be marginally likely though”, she added. The most likely scenario is a centre-left government under Pierluigi Bersani, possibly with the cooperation of Mario Monti. “As both chambers are almost equally important for legislation a majority for Bersani’s alliance in both chambers would ensure the greatest relief in EURUSD”, concluded the Commerzbank analyst.

Division of a centre-left majority in the chamber of deputies and a centre-right-majority in the Senate would put pressure on the euro. “Fundamentally the following applies: the clearer and more quickly a convincing and sympathetic to reform coalition can be formed the better for the euro”, wrote Hecht.

The EUR/USD is not expected to record any significant gains today ahead of the publication of the Italian election result.

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