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Why Italian Election Uncertainty Could Weigh on the Euro

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Euro extended losses last week

The euro-dollar (FXE) exchange rate closed the week ending February 23 at 1.23, depreciating by 0.91% against the US dollar (UUP). A mix of weak economic data and dovish European Central Bank minutes drove the euro lower against the US dollar. Last week, manufacturing and service sector activity was reported to have slowed across the Eurozone. The slower activity this month should be considered a normalization rather than a slowdown, as the economic activity in the area has improved significantly in recent months.

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European equity markets, which are tracked by the Vanguard FTSE Europe ETF (VGK), along with their global peers, managed to post minor gains last week. The German DAX (DAX) ended the week higher by 0.26%, the Euro Stoxx (FEZ) was up 0.41%, and France’s CAC gained 0.68% for the week ending February 23.

Euro speculative bets remain unchanged

As per the Chicago Futures Trading Commission’s latest commitment of traders (or COT) report on Friday, February 23, speculator positions decreased by 1,163 contracts last week. The total net speculative bullish positions on the euro (EUFX) decreased from 127,289 contracts to 126,126 contracts as of February 20. This is a minor decrease, but the upcoming Italian elections could increase volatility, forcing euro bulls to scale down their speculative bets.

Outlook for euro

This week, economic data scheduled to be reported from the EU include unemployment and inflation reports for February. Headline inflation is expected to be reported near the 1.5% level, which is not likely to have any major impact on the euro. Traders are likely to remain focused on the US Federal Reserve chair’s testimony, which could drive the forex market volatility higher. In terms of political uncertainty, Italian elections are expected to lead to a coalition. Political uncertainty is not good for a country’s’ currency, so this uncertainty could weigh on the euro. In the next part of this series, we’ll discuss why Brexit is back in focus in the UK.

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