Euro Continues Post-Draghi Decline, Breaks Below 1.34, Eyeing Italian Elections
Euro strength a problem? Not any more, as the euro reversed weeks of gains against the dollar as the EUR/USD declined back below 1.34 for the first time since January 25.
Further, the chart for the pair is anything but rosy and should the fundamentals not change much, the pair looks set to fall further.
As the chart below shows, the euro took a sharp leg lower Thursday following comments by European Central Bank President Mario Draghi on the strength of the euro. The euro fell nearly 150 pips or 1.1 percent from the beginning of Draghi's press conference to end of the speech, a massive move.
Looking at the chart here, the EUR/USD is continuing to confirm the head and shoulders top that peaked near 1.37. It is not a standard head and shoulders pattern, but there is a clear shape noticeable on the chart and the base for the pair looks down near 1.33. That level will be a real proving ground for the pair in the next few weeks.
There have been severe fundamental shifts in Europe over the past week that the euro did not price in. On Monday, Italian banking giant Unicredit fell more than eight percent and the euro barely nudged.
Spanish and Italian bond yields broke month-long downtrends and spiked to the highest levels since December, and yet the euro barely flinched. So, one argument for the recent move is that it was long overdue.
Also, markets are watching the upcoming Italian elections. As of the latest opinion polls, accounting fro tracking error, the pro-austerity coalition led by Pier Luigi Bersani, who would likely appoint current PM Mario Monti as Finance Minister, is tied with former Prime Minister Silvio Berlusconi.
Berlusconi is using his power in the Italian press to sway sentiment by promising to undo the tax hikes done by the current government to close budget gaps and also to send rebates for previous taxes paid under the new taxes.
A return to the Berlusconi government would put the euro under pressure. Under Berlusconi, Italy accumulated lots of debt and its ten-year cost of borrowing rose approximately 350 basis points. Under Mario Monti, the technocrat appointed to replace Berlusconi, Italy's borrowing costs reversed these moves.
Should Berlusconi win, it could set off the next leg of the European debt crisis. You have been warned...
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