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Fundamental Afternoon Wrap: The Italian Job

This afternoons institutional research continues, understandably, with the Italian theme very much in focus. With the rise of the Five Star Party looking like an all mighty protest vote from a tired electorate, many analysts feel that there is an inevitability in further Italian elections. Elsewhere, focus has fallen on Fed Chairman Bernanke´s testimony today, with him reaffirming the banks commitment to easing, following a perceived misinterpretation of the last FOMC minutes.

EUR/USD

Michaela Moran of BAML comments that the Italian elections have left a hung Senate and she believes that the results, especially the rapid rise of the Five Stars Party, show that there is a real zeal for political reform in Italy. She feels that further elections are on the cards but not yet definite as parties jostle for position. Meanwhile, Marc Chandler of Brown Brothers Harriman notes that the Italian political situation comes at a particularly bad time for France who themselves are finding the economic divergence from Germany is starting to put unwanted pressure on their Government bonds.

Meanwhile, Danske Bank analysts note that the Italian elections have weighed strongly on the Euro over the past 18 hours, with the pair dipping as low as 1.3050 this morning. They add that over the past 12 months, the pair has been closely correlated with peripheral bond spreads and combined with the upcoming US sequester could prove toxic for its fortunes ahead. Kit Juckes, of SocGen is expecting EUR/USD to drift towards a test of 1.25 in the coming weeks, also citing peripheral bond spreads as a key driver of sentiment.

US Federal Reserve

Kit Juckes of SocGen notes that while there is a body of US data out today, the most important will be Fed Chairman Bernanke´s testimony to the Senate Banking Committee. However, he doubts that his dovish bias can restore order to US markets and temper risk aversion. Brown Brother Harriman analysts feel that previously the markets read far too much into the recent FOMC minutes and Bernanke´s speech will reaffirm the accommodative stance of the central bank.

GBP/USD

Kit Juckes of SocGen notes that UK data this morning was poor, adding to recent downtrend, but despite the downgrade, UK 10 year Gilt yields are set to fall back below 2%. However, he feels that despite this development GBP/USD will not yet see any support and he feels that 1.40 is a viable target.

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