– Italian elections loom; we expect a EUR recovery
The EUR has been trading with a softer tone ahead of Monday’s Italian election result, with investors perceptive to the risks surrounding the elections and the possibility of a hung parliament outcome. While this would be clearly negative for market sentiment, such scenario is still not our base-case. A Bersani-Monti coalition still remains the more likely outcome, which would likely see a sizeable relief bounce in the EUR (polls close 3 pm CET). The past week has done little to change our positive EUR outlook. Although the initial loan repayments from LTRO2 fell short of expectations, the bottom line is that the ECB’s balance sheet is shrinking, in contrast to that of the Fed, BoJ and BoE. While the Eurozone data calendar is lighter this week the EUR could benefit from Fed Chairman Bernanke’s comments (see below). We have used the recent correction lower in EURUSD to establish a long recommendation from 1.3180 targeting 1.3800, with a stop at 1.2980.
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BNP Paribas