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Forex Flash: EUR in focus after Italian stalemate – UBS

Counting seems to have concluded in Italy's general election, however a victor has yet to be formally declared. Nevertheless the contours of the new political landscape are plain to see. Bersani seems to have won control of the lower house taking 29.54% of the vote, narrowly beating Berlusconi into second place with 29.18% of the vote.

However even a Bersani-Monti coalition will not have enough seats to command a majority in the upper house. Legislation cannot be passed without approval from both chambers so Italy's political system is now in stalemate. According to Research Analyst Gareth Berry at UBS, “It could take several weeks for the political dust to settle, and even a re-run of the election cannot be ruled out.”

The parallels with Greece's election outcome in May 2012 have not escaped the attention of investors as the euro has already fallen sharply over the past 24 hours with the EUR/JPY in particular dropping over 6 big figures at one point. Yet the price action does not seem overdone in our view, given the pre-election air of complacency (encouraged further by exit polls which initially pointed to a benign outcome). “The EUR/USD could be guided lower still by the performance of Italian bond and equity markets unless Fed Chairman Bernanke delivers a particularly dovish testimony today.” Berry adds.

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