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FX: Cyprus story still grabs headlines

Zareena Sayeedova, Leading Analyst, Global Markets Department at Finam Investment Company

On Tuesday, March 26, the single European currency has been trading against the dollar near lows seen in November 2012, i.e. around 1.287. Even though the initial reaction of global markets to the Cyprus affair was higher risk appetite and a stronger euro, buying sentiment petered out on Monday and the EUR/USD pair failed to hold above 1.30.

The EU’s unprecedented intrusion into private property hung over the single European currency as Cypriot depositors are under threat of sizeable losses for the sake of government interests, as uninsured depositors at the Bank of Cyprus stand to lose roughly 40% of their funds.

Meanwhile, the Italian picture remains tense as well as Pier Luigi Bersani, the leader of the Democratic Party, has just several days to enlist government support and try to form a government. Political instability could have a negative impact on Rome’s debt auction results. To remind, today Italy is to sell 6-month debt and tomorrow bonds maturing in 2018 and 2023. It should be noted that yesterday the Italian treasury placed coupon-free bonds that will mature in 2014 at 1.746%, the highest yield since December 27.

Another factor that could dampen risk appetite today is news out of China where banks could put a lid on construction loans. Consequently, in view of this news it will be no easy matter for the euro to get out of bearish territory.

In terms of technical indicators, on the 4-hour chart the EUR/USD pair is still trading lower, the real support level right now is 1.2826, and consolidation near 1.29 is the most likely scenario within the next few hours.