Italian Elections Reigniting Eurozone Debt Crisis

U.S. Dollar Trading (USD)
The Dollar gained on safe haven flows overnight withthe EUR/USD sold off dramatically after exit polls suggested no clear majority in the recent Italian Elections. Stocks markets reversed and the Yen crosses were sold aggressively across the board with some capitulation flows seen in late New York trade. Looking ahead, December Case Shiller House Prices forecast at 6.6% vs. 5.5% previously. Fed Chief Bernanke Speaks before the Senate Banking Committee.

The Euro (EUR)
The EUR/USD rallied to 1.3270 before crashing on the hung Italian parliament polls and we are targeting a 1.3000 break if the selling continues into Europe. EUR/JPY fell over 600 pips from the Monday open and was the catalyst for the USD/JPY slide which added to the EUR/USD selling pressure. The market will be closely watching the developments in coming days to see if a political deal is made and what comments the new leader makes regarding recent austerity. The Sterling (GBP) defied gravity rallying as EUR/GBP slumped through0.8600 in the Asian session Tuesday from the lofty 0.8800 level early Monday morning with the market caught heavily long. The recent sell off on the GBP/USD hit fresh lows yesterday on the AAA rating downgrade. Looking ahead, CBI Distributive Trades forecast at 16 vs. 17 previously.

The Japanese Yen (JPY) USD/JPY was caught up in the EUR/JPY storm and suffered a dramatic move in the thin trading hours between the close of New York and the start of the Asian session. The Japanese emerged with the usual rhetoric about keeping volatility low at the start of the Asian session Tuesday and we have seen a large bounce back above Y92. Australian Dollar (AUD) the Aussie was able to ignore the volatility with the usually risk sensitive currency sidelined even with the collapse of theAUD/JPY cross. EUR/AUD selling was the main support but also the hawkish Governor Stevens talk last week still underpinning with the RBA seen unlikely to cut next Tuesday.

Oil & Gold (XAU
Gold is getting support from the increased sovereign risk as the hung Italian elections ratcheted up risk aversion. OIL/USD fell another $1 down to $92 where it consolidated ahead of the Bernanke Speech tonight which will focus on the US economy and monetary policy.

Pairs to watch

EUR/USD to test 1.3000 key psychological support?

USD/JPY Bulls getting mauled,will Japanese Jawboning help?

TECHNICAL COMMENTARY