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Forex Flash: EUR/USD uses political headlines in Spain and Italy to take profits - Commerzbank

Commerzbank analysts believe the market used the negative headlines regarding the political leadership in the problem countries Spain and Italy as a reason to take profits, pulling the EUR/USD from the 1.37 mark down to 1.35.

"In Madrid there have been increasingly louder calls for Prime Minister Mariano Rajoy to stand down following a bribery scandal, thus fuelling concerns about a political crisis. The timing of such a crisis would indeed be particularly inconvenient as the situation on the financial markets has begun to improve to such an extent that any ESM aid measures became unnecessary", wrote analyst Thu Lan Nguyen, pointing also to Italy's political backdrop, with Berlusconi running for Prime Minister again. "After all, a change of government in either country would threaten current austerity measures".

Commerzbank analysts say that rebalancing national debt and sustainable budgets are the be all and end all of finding a way out of the debt crisis and a set-back in this respect would also constitute a set-back for the EUR. "Moreover there is an important event on the horizon in the shape of the ECB meeting on Thursday, with the potential to shake up markets considerably. Against this background the
majority of market participants is likely to take a wait and see approach and will refrain from a test of the upper end in EUR-USD for the time being", added Nguyen.

In case the political situation in Spain and Italy increases market concerns, the pair is rather likely to move further south where the next major resistance is located in the area around 1.34. "On the upper end the recent high at 1.3711 constitutes the major obstacle at present", said the Commerzbank analyst.

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