EUR/USD: Euro Drops as Italian Vote Points to Political Stalemate

Heightened worries over another bout of political uncertainty in Italy are believed to continue debilitating the Euro alongside the US dollar today. In a national election tipped to push Italy further down its path of economic reform, voters delivered a political gridlock that could once again rattle the region’s financial stability.

Following the fall of the last Silvio Berlusconi government in 2011 and the establishment of the Mario Monti administration, the election had been keenly awaited to clear the air and help Italy continue on its economic reforms. Instead, the election looks likely to have complicated matters. Results suggested a highly unstable outcome, pointing to a further six months of uncertainty and a possibly another election. A majority of voters endorsed parties that had promised to tone down or reverse the financial sacrifices Italy has promised its European partners. The left-wing coalition led by the Democratic Party’s Pier Luigi Bersani appeared to have edged out Berlusconi’s center-right coalition in the lower house. In the senate however, Berlusconi’s coalition is likely to take control.

Analysts say the resulting uncertainty bodes adversely for the nation’s efforts to pass the tough reforms necessary to stem its economic crisis and soothe market nerves. Decisions to be made by the Italian government over the coming months are seen to have a deep impact on whether Europe can decisively solve its financial crisis. As the bloc’s third largest economy, renewed problems could rattle market confidence. The result raised the possibility of new elections in the coming months, the worst possible outcome for markets looking for Italy to start the course with painful but necessary reform. The election surprise also poses a challenge for Germany, which has demanded that financially challenged Euro Zone nations repair their economies in exchange for supporting the ECB’s pledge to save the bloc. A public rejection of austerity in Italy could spread to Spain and other countries, risking another round of contagion that effectively closed a number of Euro Zone credit markets. On renewed concerns over the Euro Zone’s financial stability following the Italian election, the single currency is apt to wane today, warranting a short position for the EUR/USD trades.

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