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EUR/USD: --- Italian elections next headline catalyst for Euro?

FXstreet.com (Barcelona) - EUR/USD: --- Italian elections next headline catalyst for Euro?

The headline drama out of Europe seems to come and go in recent months. Although the underlying problems are well known to all by now (initial Fitch downgrade of Greek Debt was way back in October 2009), it seems the market can go 2-3 weeks without hearing any type of rumor which rattles markets. Then, when no one least expects it, we get news out of Cyprus over a weekend which put markets in turmoil as futures opened on Sunday evening. Thankfully, the panic didn’t last long as investors came to their senses and cooler heads prevailed in a matter of days. Another example was earlier this week, when ECB Official Weidmann made a dovish statement on current interest rate policy which sent the euro sharply lower in a matter of minutes.

That leads us to the next major catalyst out of Europe, which many believe to be the elections currently taking place in Italy. Lawmakers are meeting this week to select a new president, as President Giorgio Napolitano’s term will be ending next month. However, the elections have already shown signs of political indecision which may be a sign of things to come.

According to Kathy Lien of BK Asset Management, “After two unsuccessful votes where politicians casted blank ballots, Italy is now forced to hold a third round of votes on Friday. While the head of state is a mostly symbolic office, the President will play a crucial role in cajoling politicians into forming a government. The selection of the President is also an important test of the current government's ability to work together and today's results show that they have failed abysmally.”

Regarding the need for a third round of votes on Friday, Analysts at BBH commented, “The best outcome for the markets is a resolution tomorrow on the third ballot. If the center right and center left can agree on a presidential candidate, it might be seen as a sign of a broader political agreement. “

Even with the news additional voting would need to take place, price action in the pair has remained relatively quiet. According to analyst Val Bednarik, “The EUR/USD continued its routine of moving up and down with not much behind the movements but market players standing extremely nervous on any single headline. Having started the day looking to recover the ground lost on Wednesday, the EUR/USD was unable to advance beyond 1.3100, and closed the day barely positive.”
Given all of the headline risk, it is not hard to understand why the pair remains primarily range bound.

The majority of big players (trend following CTA’s and Global Macro hedge funds) seem to be flocking to the Japanese Yen cross rates, where the charts are in a much more defined trend on the weekly and monthly time frames. Until either side of the recent range in EUR/USD can be taken out (particularly on a weekly close), expect more of the same.

Going into next week, some of the big reports out of Europe will be German PMI, German Ifo Business Climate, and a couple of a bond auction out of Italy. Major reports out of the US will include New Home Sales, Advanced GDP, and Consumer Sentiment.

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