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Forex Flash: Euro´s sharp ascent comes crashing to a halt – BTMU

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Euro’s recent sharp ascent has come to an abrupt halt early this week with EUR/USD dropping sharply from an intra-day high of 1.3711 on Friday.

At present, he sees that the EUR´s recent drop is more likely a correction following recent strong recent gains, although the price action supports his view that the majority of the downside tail risk has now been fully removed from the Euro at current more elevated levels leaving risks to future direction more balanced.

Hardman continues to note that EUR/USD has risen sharply from a low of around 1.20 (when the Euro’s risk premium was elevated) in July 2012 to its recent high of just over 1.37 (to where the Euro risk premium has almost been eliminated) over the last six months. From this perspective, he feels that it is not surprising to see the Euro more vulnerable to the downside again from rising political uncertainty in Europe which has re-widened the Euro-zone sovereign credit risk premium.

He notes that political uncertainty has risen in both Italy and Spain over the last week. In Italy the latest opinion polls are continuing to signal that Berlusconi’s People of Freedom Party (PDL) are narrowing Bersani’s Democratic Party’s lead heading into the elections to be held on the 24th and 25th February. At present, Hardman notes that the most likely outcome still remains the formation of a more favourable coalition government between Bersani’s centre-left party and Monti’s alliance of centre parties. However, the polls are highlighting the increasing the risk of a more unstable government forming. Elsewhere, he notes that Spanish Prime Minster Rajoy and other senior leaders from his Popular party have become embroiled in a financial scandal which is serving to undermine investor confidence.

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