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Forex: EUR/USD continues sequestered by sellers

The European-shared currency, as highlighted yesterday, was finally the victim of a corrective appreciation disguised in bear's clothing. After a promising upside day on Wednesday, risk appetite was nowhere to be found in the last US session, leading to solid bids in the US Dollar, as US equities suffered a major turnaround into negative territory.

Part of the reason some commentators are blaming the strong USD performance across the baord is due to the Senate's decision to not approving the last attempt to agree on spending cuts, resulting in the automatic spending cuts, also known as 'sequestration' to kick in today March 1st, which may shave over $85 billion worth of spending cuts in the current fiscal year.

Kathy Lien, co-founder at BK Asset Management, notes: "We've been down this road before with the debt ceiling and survived."

But as Kathy adds, here comes the kicker: "The Obama Administration has another 30 days to come up with a deal to cancel and avoid the cuts. The more important deadline is March 27th, when the government runs out of money and will be forced to shutdown if no additional measures are taken." Investors are holding out hope for a last minute deal, Kathy says.

While market participants are holding out hope in the United States, on the other side of the pond the ability to patiently await for political news out of Italy is also the main focus. For now, and despite the Euro depreciation on Thursday, peripheral bond and equity markets also showed a good effort of calmness, with mixed low valatile activity, but nothing even close to break loose... The key is now wait for a possible grand coalition government or schedule second elections.

Negotiations in Italy to form a coalition government are expected to be held in the week ahead, and according to Bank of Tokyo-Mitsubishi London office, "will leave the euro vulnerable for longer to the downside" although the bank says that "fresh elections are unlikely to be called in the week ahead", suggesting that talks may drag for quite some time.

Investors will need to be prepared to be extra-alerted to all the possible risk headlines. The bottom line, according to Kathy, is that "the outcome will most likely be a weak government that is unable to deliver meaningful reform or austerity."

Technically, as noted in a previous article, there is an ongoing bearish pattern in the EUR/USD, best noticed from the H4 chart, in which price has developed a sequence of predictable behaviours in each correction before the subsequent sell-offs. The dynamics of this pattern seems to suggest that the selling pressure is set to continue.

As Valeria Bednarik, chief analyst at FXstreet.com, notes: "The hourly chart shows 20 SMA gaining bearish slope above current price while indicators head south in negative territory, supporting further slides. In the 4 hours chart technical readings also support the downside, with recent lows around 1.3010 as key level to break, targeting then the 1.2880 price zone."

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