Euro slips as concerns over Italy re-surface

EUR:

Financial markets opened the week nervously on Monday as political turmoil in Italy re-surfaced after Prime Minister Mario Monti declared his intention to step down as soon as the 2013 budget was passed. His announcement caught investors off guard, and raised questions on who will take the helm of the euro area's third largest economy after him.

The Euro slipped close to its two-week low versus the Dollar on Monday, while Italian share and bond prices fell as investors grew concerned that a change in government would throw efforts to solve the nation's debt crisis off track.

Apart from peripheral Euro Zone worries, concerns over core countries also weighed on the single currency and market sentiment on Monday. Published data showed Germany's trade surplus eased to its narrowest in over half a year in October as demand from its recession-plagued European trading partners waned and hurt its exports. The data followed last week's cut of its growth forecast by the Bundesbank to 0.4 percent in 2013 from an early estimate of 1.6 percent.

EUR/USD opened the week lower, by 1.2890, and fell to a session low of 1.2886 in Asian trade. The pair recovered during European trade to a session high of 1.2938. News that Greece was close to its debt buyback target gave some support to the single currency,

USD:

On Friday, a report on the labor market in the United States showed employers hired more than expected in November.

The rise above market forecast in the change in non-farm payrolls came as a surprise, as the havoc and disruptions caused by Super Storm Sandy were expected to have a more significant impact on the labor market. The report also showed that the jobless rate in the world's largest economy fell to almost a four-year low.

Change in non-farm payrolls rose 146,000 in November, versus consensus for 85,000 after rising 171,000 the previous month. Private payrolls rose 147,000 from 184,000, but beat expectations for 90,000. The unemployment rate fell to 7.7% from 7.9% against a forecast for an unchanged rate.

EUR/USD dropped to a two-week low by 1.2877 following the release of the jobs report, while the USD/JPY surged to 82.83, just shy of hitting a fresh eight-month peak, but signs that Washington policymakers were no closer to averting tax hikes and spending cuts set to take hold next year if a deal is not reached, weighed on the dollar and halted its rise.

Also keeping dollar gains in check are economists' expectations that the Federal Reserve will announce fresh monthly bond purchases of $45 billion, at their FOMC meeting on Wednesday. The Fed is expected to signal it will keep pumping cash into the economy during 2013 in a bid to curb unemployment and in its quest to avert a recession in the case the US falls over the 'fiscal cliff'.  USD/JPY fell to a low of 82.12 on Monday, on prospects of further Fed easing, while fiscal cliff concerns and political turmoil in Italy boosted demand for the safe-haven yen. 

JPY:

The Yen strengthened to its highest in almost two-weeks against the euro and pushed away form an eight-month trough against the greenback on Monday as the political uncertainty in Italy has added to uncertainty in Europe.

Japan's currency gained against most of its major counterparts as global stocks and riskier assets fell. EUR/JPY dropped to 105.98 while AUD/JPY fell to 86.05 after trading as high as 86.72 on Friday, its highest level since it hit 86.77 on 2 Aril.

GBP:

On Thursday last week, the Bank of England announced no change to its key interest rate, leaving it at a record low 0.50 per cent, as expected. The central bank also kept the current asset purchases target at £375 billion as monetary policy officials assess the need for more easing after Chancellor Osborne committed Britain to another five years of austerity.

Governor King and the Monetary Policy Committee decided to leave rates and their quantitative easing target unchanged at their meeting on Thursday but left the door wide open for further stimulus if needed.

EUR/GBP fell to almost a three-week low on Monday, to 0.8036, continuing its decent from a one and a half month peak hit on Wednesday last week by 0.8148. The pair should run into significant support at the 0.80 level, represented by a medium term bull-trend line from July of this year. A break below the psychologically important 0.80 levels may pave the way for further declines to 0.7950, while a bounce from here could see the pair back to test above 0.8150.

 The author is a Senior Market Analyst on RTFX Ltd Trading Floor.