Euro tumbles following the Italian election

In an explosive day for wise money markets, the single European currency was the worst performer of the majors.Euro tumbles following the Italian electionAt the start of the session, the euro opened the week on a fairly solid start, but that quickly faded as headlines grew on the Italian election.

The initial euro rally was a reaction to a solid win for a pro-austerity, pro-euro Nicos Anastasiades as the Cypriot president.

Although not a resolution to the issues the small island-nation faces it does relieve it as an instant danger.

Next on the agenda is the far more critical Italian election.

The likelihood of a clear victory for an individual party never really seemed to develop but there was some cautious expectation that a pro-euro coalition could be created.

Early counts proved that would not be possible and led to a no clear winner which forces either a grand coalition or a re-election.

Additionally, the anti-austerity groups appeared to gain significant momentum – voters clearly displaying their frustration over a deepening recession. A full resolution to Italy’s election issues may not be resolved up for a few weeks.

In the meantime, speculators will start to worry over the renewed fear of fiscal tension in the Euro-area will do to bond yields. If the debt markets dry up, the ECB may have to reverse its contracting balance sheet.

Sterling opened the week with a prominent, 34-pip gap to the downside. Other sterling-based crosses produced bigger discrepancies during the on the opening of official trade yesterday.

The piercing move lower was the first chance for many to respond to the Moody’s rating agency’s downgrade of the United Kingdom’s AAA-rating late Friday evening. This downgrade certainly dents Prime Minister Cameron’s effort to balance his austerity push while warding off recession.

Today we should note an Italian bond auction in the early morning session where €8.75 billion of 6 month debt is on offer and this afternoon we have US Consumer confidence for the month of February where a reading of 62 is expected.

Sterling could dominate the headlines tomorrow morning with a GDP number due tomorrow morning expected to show 0% YOY and -0.3% for the for the Quarter.

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