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The European currency appeared to be under pressure of political risks once more - this time from the Italian right-wing forces. Until recently, the currency market was vigorously discussing the surprisingly high results of the German far-right party (they took the third place in the parliamentary elections), and today eurosceptics of Italy demonstrated a similar breakthrough.

According to preliminary results, the "Movement of Five Stars" and the "League of the North" scored surprisingly many votes. Eurosceptics celebrate an unequivocal triumph, as none of the experts predicted such a successful outcome for them. Italy has become another country where populists and radicals have received the support of a broad party of the population.

In Britain, such sentiments resulted Brexit, in Spain the growth of Euroscepticism ended with a referendum on the independence of Catalonia, and in France - the second round of presidential elections with the participation of Le Pen. In Germany, Greece, Scandinavia and Benelux, political forces of the far-right wing also received a second wind, reflecting the general mood of the electorate. At the moment, only the British were able to realize the idea of separation- in other EU countries, the key positions are still occupied by supporters of the Alliance.

At the same time, the results of the Italian elections frankly surprised and even frightened traders. The euro/dollar pair dropped to the 22nd figure at the opening of the trading, reacting to the first results. The fact is that the market for a long time was relatively calm about the popularity of right-wing radicals in Italy: according to the new rules of the electoral process, a very complex proportional-majority system will operate in the country: 225 deputies are elected by majority districts, another 386 parliamentarians by party lists. This system provides an advantage to coalitions, while the members of the "Five Star Movement" initially categorically refused to cooperate with both the right wing and the left wing of Italian political forces.

In turn, none of the participants in the political race scored 40% to form a majority. Center-rightists gain 37%, the left - barely got to the 20-percent mark. All this indicates the political fragmentation of the Italians, increasing the likelihood of a parliamentary crisis. Now politicians will have to negotiate with each other, seek compromises and "share portfolios" of government posts. An alternative option is holding a re-election. This scenario is unprofitable for the main political forces, so we are expecting the formation of a "coalition" that will take a long period of time.

It should be noted that in Germany this process lasted about five months - and only this weekend the politicians put the long-awaited point in this matter: rank-and-file members of the SPD formally supported the coalition with the CDU/CSU, and Angela Merkel will now take the chair of the chancellor for the fourth time. After the congress of the Social Democrats, this scenario was quite probable, although the members of the youth wing of the SPD actively opposed this coalition, agitating for the sabotage of the agreements reached. Therefore, a certain intrigue in this matter still existed. Merkel's victory remained in the shadow of the Italian events, although, in my opinion, this fundamental factor is of far greater significance for the prospects of the European Union.

Thus, the current behavior of the euro/dollar pair reflects the overall fundamental background on the market: on the one hand, political stability in Germany, on the other - the risk of a parliamentary crisis in Italy against the background of growing popularity of the right-wing forces. If Italy follows the example of the Germans and creates a "broad coalition" (Renzi-Berlusconi), then the likelihood of a foreign policy change will fall as much as possible and the currency market will switch to other fundamental factors. But in case of re-elections or another format of the coalition, the euro will be under rather strong pressure.

However, the dollar is now also not in the best shape. Apparently, Trump decided to exacerbate trade relations not only with China, but also with Europe. In addition to imposing duties on imports of steel and aluminum, the White House proposed setting import duties on cars from Europe. Such an idea was perceived as "hostile" by the Europeans: the German Minister of Economy and Energy bluntly stated that in the game started by Trump "there will be no winners", hinting at the same time to reestablish many customs barriers. The European Commissioner for Trade also criticized the US president, noting that such decisions have a negative impact on transatlantic relations.

This fundamental factor is negative both in relation to the dollar and against the euro, since the war of duties between the EU and the US will have a corresponding effect on the dynamics of their economic growth. For example, the countries of Europe (primarily Germany) send to the United States a quarter of all cars produced in the region - the annual sales volume is about 250 billion dollars.

But here it is worth recalling that Trump unveiled "military actions" in foreign trade, not only in relation to the European Union. In addition to the already mentioned tariffs on imports of steel and aluminum (South Korea, China, Germany and Japan will be most affected), America is initiating the revision of the North American Free Trade Agreement (NAFTA), thereby worsening relations with Canada and Mexico. By the way, today is the last day of the seventh round of trilateral talks - if this time there is no compromise, the fate of NAFTA will be decided.

The aggregation of these fundamental factors has a contradictory effect on the euro/dollar pair. The problems of the European currency are compensated by the uncertainty surrounding the prospects for the dollar in the light of the recent decisions of the US president. The situation remains in limbo - however, the price range of the flat has somewhat widened.

Exchange Rates 06.03.2018 analysis

The lowest point of the range is now at 1.2180 (the bottom line of the Bollinger Bands indicator on the daily chart). The pair's bulls still need to overcome the level of 1.2360 to confirm the northern movement. In this case, the indicator Ichimoku Kinko Hyo will form a bullish "Line Parade" signal, and the price will be located between the middle and top lines of the Bollinger Bands indicator on D1. However, such a breakthrough requires an appropriate information reason: the formation of a "broad" grand coalition in Italy and the "hawkish" rhetoric of the ECB at the next meeting (March 8) will help the pair to return to the upward trend.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Performed by Irina Manzenko,
Analytical expert
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