EUR/USD: Euro Under Pressure as Monti Exit Threatens to Push Italy Back to the Limelight

The Euro is deemed to sustain its losses alongside the US dollar today as Italian Prime Minister Mario Monti’s intention to resign threatens to provide further uncertainty over the Euro Zone’s fight against the debt crisis. Prospects of another political crisis in Italy are foreseen to push the region’s third largest economy in to the forefront of the crisis. Meanwhile, fresh economic reports are once again believed to paint a bleak picture of the Euro Zone economy.

A likelihood of a political crisis in Italy sooner than expected are expected to drive up Rome’s borrowing costs and reignite tensions in the region after months of calm on the bond market. Monti’s surprise announcement last Saturday that he plans to resign after the approval of next year’s budget raised the possibility of an election in February, weeks before the end of his term in April. According to analysts, uncertainty over who will succeed him will likely become the most pressing concern. Monti has been widely credited with restoring faith in the country’s capacity to survive the crisis since he took over. His accomplishments include steering through Parliament tough pension reform, higher sales taxes and a revived property tax. In his announcement, Monti said he received a judgment of no confidence from former Premier Silvio Berlusconi’s centre-right party, which still hold the largest representation in parliament. Berlusconi is set to run in February, saying Monti’s austerity measures had deepened the recession. Hence, fears that the next government will lose its appetite for austerity, pushing up Italian bond yields anew and risk another bout of contagion, are believed to weigh on the Euro.

Meanwhile, growing speculation that the European Central Bank could cut interest rates early next year if the economy fails to pick up is apt to apply further downward pressure on the shared currency. Policymakers last Thursday said that the bank held a wide discussion about a possible cut this month. Separately, central banks in Germany and Austria suggested that a pick-up in the Euro Zone was unlikely while forecasting bleak growth in 2013. For its part, the Bundesbank estimated the German economy to expand by just 0.4 percent in 2013, down significantly from a June forecast of 1.6 percent. Austria’s central bank also slashed its 2013 forecast to 0.5 percent from 1.7 percent it had estimated in June, due to the global downturn, weak investment and sluggish consumer spending.

For today, the Sentix Investor Confidence index is seen to remain in the negative. The index gauging the relative outlook for the Euro Zone is projected to come in at -16.2 points in December from -18.8 points last month, still suggesting elevated levels of pessimism. The October Italian Industrial Production is also on tap, with economists estimating a 0.2 percent drop in output following the 1.5 percent fall in September. The only potential bright spot is French Industrial Production report for October, which is deemed to have gained 0.4 percent after plunging 2.7 percent in the previous month. Nevertheless, considering the uncertainty caused by Monti’s resignation and the still weak prospects for the economy, a short position is advised for the EUR/USD trades today.

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