Euro Rebounds As Italy's Monti Seeks To Allay Concern

Although the euro was under pressure in Asian and European sessions on Monday as Italy's Prime Minister Mario Monti said over weekend that he will resign once the 2013 budget passes, raising concerns that the government may not continue to control the country's fiscal policy. The pair staged a recovery in New York as Italian 10-year bond yield retreated after early strong rise as Italy's Monti sought to allay market fears about his country's outlook by saying that investors should not expect the imminent demise of his government to lead to a political vacuum that will fuel market turmoil in Italy.

Ealier on Monday, the single currency opened lower in New Zealand and fell to session low at 1.2881 after weekend news of Italy's Prime Minister Monti's resignation and price remained under pressure in Asia and Europe. However, the pair edged higher in tandem with cable in New York morning as Italian 10-year bond yield slipped off from intra-day high of 4.909% and price ratcheted higher to session high at 1.2946 in late New York afternoon.

After the announcement of resignation from Italy's Monti at the weekend, he said on Monday that:

...market reaction to Italy's political situation is understandable; market reactions should not be dramatised, confident Italian election to lead to a highly responsible government; not considering standing as candidate in election at this time, concentrating on completing mandate; convinced Italy will remain active participant in building a unified Europe; there is risk of populism on economic, European issues, hope will be avoided in upcoming Italian election campaign; markets should not fear a decision-making vacuum in Italy.

Although the British pound traded narrowly in Asian session and dropped briefly to 1.6014 in European morning, cross buying of sterling vs other currencies pushed the pair above Friday's high at 1.6061 to 1.6096 in New York morning before retreating.

Versus the Japanese yen, dollar went through a roller-coaster session. Although price rose initially to 82.64 in New Zealand session, active cross buying of yen versus other currencies pressured the pair in Asia and price dropped below last Friday's low at 82.18 to 82.12 in Europe but lack of follow-through selling prompted investors to buy the pair and USD/JPY rebounded to 82.43 at New York midday.

In other news, the Bank of England Governor King said in New York that "global economic recovery of a durable kind is proving elusive; UK output has been broadly flat over past two years; 'Black cloud' of uncertainty from eurozone has diminished recovery in UK investment spending; euro area problems do not seem capable of easy resolution; UK needs to see slowing of consumer, government spending in the long-term."

On the data front, EU Sentix investor confidence in December came in at -16.8, versus the forecast of -19.0 n -18.8 in November. China's export in November rose by 2.9% only, much lower than economists' forecast of a 9.0% rise.

Data to be released on Tuesday :

U.K. RICS house prices, Australia NAB business confidence, Germany WPI, ZEW current conditions, ZEW economic sentiment, EU ZEW economic sentiment, U.S. trade balance, Redbook retail sales, Wholesale inventories. First day of the 2-day FOMC meeting.