EUR/USD (1.4375) Over the course of yesterday, traders became progressively aware of how far the Italian government had moved away from the rigorous austerity plan it proposed on August 12th. After already dropping the proposed wealth tax, policymakers scrapped the planned age adjustment for pension entitlements and the sharp cuts in funding to small towns. The scrapped measures mean that instead of balancing the budget by 2013, as originally planned, the government could still face a significant budget shortfall. Instead of the ‘certain gain’ that would result from a pension reform, the government is now to pursue the ‘uncertain gain’ of a crackdown on tax avoidance. On its own this news could have been enough to put some fresh downward pressure on the euro. However, very few market commentators use this as an argument to explain the latest weakness. Had the market been aggressively short, the news would likely have been played for all it was worth. Rather, the story was met with indifference among traders, suggesting perhaps few positions. In addition, our Market Bias Index suggests the typical market participant is unlikely to perceive any gain or loss on any positions they do hold.
Against this neutral backdrop, and on where we see the best nearby demand and supply, we propose a trading range for the euro between 1.4250 and 1.4590.
Market Bias Index
The euro-dollar bias has now fallen back to zero. Also, thanks to yesterday’s correction, the perception of CHF undervaluation has also diminished to unremarkable levels.
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Deutsche Bank
Fixed Income Research – Global