Euro pummelled on Italy concerns

It has been a volatile start to the week for FX markets as investors react to developments or lack of developments from the weekend.

Investor focus remains pinned on the possibility of a US government shutdown. The political impasse has seen a flight to safety, with the yen being the main destination of choice. USD/JPY closed at around 98.23 on Saturday and has dropped to a low of 97.66 early in Asia. The pair has now mildly recovered to 97.9 and still has a big gap to fill on the chart. It is a big week on both sides of the equation for the pair as the USD has to navigate through the potential government shutdown and a raft of Fed members hitting the wires.

US Fed chief Ben Bernanke along with Fed members Powell, Stein, Dudley, Rosengren, Williams, Fischer and Lockhart are all set to hit the wires. It will also be a big week for jobs, with the ADP private payrolls report due out on Thursday morning followed by the official non-farm payrolls reading on Friday night.

On the Japan front, PM Shinzo Abe is expected to announce the sales tax hike tomorrow. Finance Minister Aso was also on the wires saying Japan is not urgently considering a corporate tax rate cut. Unless Japan also announces a definitive plan to counter the impact of the sales tax hike then this will only result in further strength in the yen. The BoJ is also due out at the end of the week, with no major surprises expected. As a result, there is significant pressure for further downside to the pair.

Looking at the risk currency pairs, EUR/USD has had a rude awakening to the week; dropping to 1.348 in the wake of the latest political drama out of Italy. Former PM Silvio Berlusconi is at the centre of the issue as his allies, led by Deputy Premier Angelino Alfano, plan to quit the cabinet. There will be a meeting in Rome as leaders try to salvage a solution. We will be keeping a close eye on peripheral yields for an indication of any change in sentiment. On the data front it’s all about PMI numbers from the eurozone this week and investors will be keen to see if the recent improvement in economic data for the region continues.

While no change in rates is expected at this week’s meeting, Mario Draghi’s press conference will be one to watch after his last comments suggested another LTRO might be on the cards. As it stands we have seen some sharp moves in euro crosses, with EUR/JPY being one of the biggest movers. The safe haven trade has really played into the hands of the yen. There is an uptrend on the daily chart running from April which comes in at around 131.3. This level also coincides with the 100-day moving average and has swiftly turned into key support. A daily close below this level will be ideal for initiating short positions.

GBP/USD had a strong run higher on Friday on comments by BoE Governor Mark Carney saying he does not see a case for more QE. The pair is one of the best looking trends in the market at the moment and has printed a fresh high of 1.617. With the pair testing September 19 highs, there is a strong possibility it could climb even more and make a run towards this year’s highs. The pair has been undeterred by all the negative risk talk dominating markets at the moment and any beats on the data front will only result in further gains for the pair. There is now strong support coming in at the 1.60 level which also coincides with an uptrend support line which has been in place since January this year.

AUD/USD has lost the 0.93 handle and has had a tough start to the week with a raft of data due out locally this week. Tomorrow we have the RBA due out, with no change expected in policy. We also have some key metrics set to be released such as retail sales, building approvals and trade balance.

China has some manufacturing PMI numbers due out today but then will be closed for a week-long holiday starting tomorrow. Any positive prints in local data could lead to an AUD recovery on the notion that the RBA’s easing cycle has run its course.

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