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Forex Flash: Potential for good news as Italian election may force EU austerity reduction - BTMU

Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that the ECOFIN meeting finished yesterday with little of note.

However, he feels that there is however potential good news in the evidence that the Italian election result may mean less forceful austerity for countries with high debt. EU Economic Commissioner Ollie Rehn stated that economic conditions could justify a review of deadlines in place for correcting excessive deficits and given the very weak economic conditions in France coupled with the election result in Italy, two of the big three countries will be strongly pushing for less austerity ahead.

Halpenny writes, “That, we could argue, is good news at the margin for the euro-zone and the euro, but it still doesn’t take away from the austerity that is already in the pipeline for 2013 which will ensure very weak real GDP growth this year. Real GDP for Q4 is likely to confirm contraction of 0.6% today.” He finishes by noting that it is notable that as the Dow Jones sits at a record high, EUR/USD is barely holding above 1.3000. He writes, “The dynamics have changed in the FX market and the change bodes well for the US dollar. However, the ECB decision tomorrow when we expect rates to be left unchanged should limit EUR/USD downside risk for now.”

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