Italy Drags Euro Down

A stable government in Italy remains a distant reality with the election deadlock, thereby weighing heavily on the performance of the Euro. The centre-left Parties, led by Luigi Bersani, won majority in the lower house while former Prime Minister, Silvio Berlusconi, appears to have the lead in the Senate. Markets are jittery, with the US Dollar likely to take the central role in the latter half of today’s session, as Bernanke’s first bi-annual testimony will be closely followed, given widespread calls for a partial withdrawal of monetary stimulus from Fed policymakers. Meanwhile, CBI sales data later today will be watched for the health of the UK retail sector.

Pound Sterling – UK Markets

The Pound has gained traction against the single currency in today’s trading session, as an inconclusive general election in Italy sparked worries that another chapter in Europe’s debt saga could be opening. It would be interesting to see how long Sterling remains supported in the absence of any major domestic positive triggers. Meanwhile, data from BBA released yesterday revealed that businesses and households adopted a cautious stance, as they paid down their debt amid prevalent worries in the domestic economy. With last week’s BoE minutes revealing that more officials, including Governor Mervyn King, voted in favour of another round of bond buying, today’s MPC testimony to the Treasury Select Committee will be closely scrutinised to gauge if any of the MPC members are showing signs of voting in favour of increasing the asset purchase target in the next meeting. Markets are expected to pay modest attention to CBI reported sales scheduled for release today for insights into trends in the UK retail sector. With January retail sales falling sharply, it will be interesting to see whether today’s data provides some signs of revival.

US Dollar – US Markets

The “risk on” sentiment has received a sharp blow amid signs that elections in Italy will fail to produce a stable government, leading the US Dollar to nudge higher against the common currency. Meanwhile, the Fed Atlanta Chief, Dennis Lockhart, reiterated his call for continuing with the current monetary policy at least into the second half of 2013. In this context, the Fed Chairman, Ben Bernanke‘s semi-annual testimony to Congress later today will hold particular importance for decoding the future course of action that policymakers might likely adopt. However, given the bleak employment scenario, Bernanke is likely to continue with his dovish stance for the near term. On the macro front, recent regional indicators continued to paint a mixed picture for the US economy, as data indicated that manufacturing activity in Dallas expanded at a slower pace for February, while the Chicago activity index moved into negative territory. Against this backdrop, it remains to be seen whether today’s Richmond manufacturing index provides any positive surprises. Today’s consumer confidence figures are expected to show an improvement for February, despite the looming uncertainty surrounding the US budget talks. Additionally, some housing data features on the domestic economic calendar.

Euro – European Markets

The political gridlock in the Italian election has raised worries about the continuation of fiscal reforms in the nation, leading the Euro to trade below the 1.31 mark against the US Dollar in today’s trading session. In a clear disapproval of current economic policies, voters gave a favourable mandate to anti-austerity parties, with the outgoing Prime Minister Mario Monti’s party receiving a major setback. The election also sent bond markets tumbling, as Italian and Spanish bond prices declined, pushing Italy’s 10-year yield to the highest level since December 2011. Meanwhile, with Germany taking tentative steps towards recovery, the ECB board member, Joerg Asmussen, provided some relief as he expects the Euro-area’s largest economy to come out of contraction in the first quarter of 2013. With a light economic calendar today, market sentiment is likely to remain subdued given the deepening crisis in Italy. Market participants are expected to look across the Atlantic for further direction to risk appetite.

Other Currencies – Highlights

The New Zealand Dollar has declined against its major peers in today’s trading session, as the outcome of the Italian election heightened fears of political instability in Europe. Moreover, a survey by the Reserve Bank of New Zealand revealed that the pace of inflation is likely to ease in the future. The Reserve Bank of New Zealand Governor, Graeme Wheeler, had earlier warned that the central bank might use intervention, or even cut interest rates, to combat an overvalued currency. The easing inflationary pressures appear to be offering more room to the Reserve Bank of New Zealand to resort to these measures, if the need arises. Apart from comments from the Fed Chief, Ben Bernanke, traders are also expected to keep an eye on New Zealand’s trade balance data, due for release towards the end of today’s trading session, for further direction to the Kiwi Dollar.