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Forex: EUR/USD offered below 1.28; Italy and Cyprus main focus

FXstreet.com (Barcelona) - After absorbing what little demand was left around 1.28 last week, the Euro ended the first quarter of 2013 printing fresh bear trend lows at 1.2750 before profit taking on the long-weekend Ester holidays.

Today, in the first few hours of trading marking a new quarter, the rate was unable to hold the 1.28 ahead of the next European session, expected to develop on slow fashion as most European markets remain closed.

In retrospect, as FXstreet.com contributor Babypips notes, the largest banks' predictions, including those of Citibank, Goldman Sachs, HSBC, and BNP Paribas, were able to predict price action with extreme accuracy through Q1 2013.

On the fundamental domain,the Italian political gridlock, which continues in a state of outright irreconcilability, is now likely to come back on the spotlight as Cyprus risk headlines seem to no longer carry as much relevance after the outrageous bail-out/in rescue solution taken by the Cypriot government is digested by the market.

On the Cyprus drama, it was learnt over the weekend that large deposits above 100,000 euros sitting on Bank of Cyprus accounts face losses of as much as 60%.

As explained by FXstreet.com earlier on, according to the Cypriot central bank, customers with accounts above 100,000 euros will have 37.5% of their deposits above 100,000 euros converted into shares, and an additional 22.5% is to be provisionally withheld until a recapitalization process is complete.

Societe Generale currency strategist Sebastien Galy still finds appealing the idea for a lower EURUSD as the main deal.

Mr. Galy notes: "Cyprus decided to effectively freeze all deposits above 100k in the two banks and in the offshore one to swap 60 percent for stocks. Excluded are government and financial institutions. Trusts are completely frozen until ID is shown. It looks like a very raw deal for what are presumed russian clients, suggesting we haven't heard the last of it."

According to Sebastien, the latest news "will increase the perception that government debt is ultra prime in Europe and this at the expense of all, which should reinforce the widening differential between EU and US rates, pushing EURUSD lower..."

Global Head of Currency Strategy at Brown Brothers Harriman, Marc Chandler, agrees of the downside risk for the Euro going forward too, noting that "the next down side target is $1.2680, which corresponds to a retracement objective of the euro's rally sparked by ECB Draghi's comments in late July 2012.”

The analyst adds, however, that “we remain concerned that from a technical perspective the euro is stretched, with the new four month lows not confirmed by the RSI." Perhaps the 5-day moving average may offer some guidance, he tips.

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