Euro Plunge Reflects Market's Verdict On EU Summit: Downside Remains In Focus

By FXstreet:The EUR/USD finally closed at 1.2970 after bouncing barely 20 pips from December's low at 1.2950. A modest short covering boost following the 135 pips late in the session collapsed from 1.3085 early in the session.

A key issue that will be addressed this week is how will the ECB respond to the electoral outcome of Italy. The outcome of the Italian election is not yet really known in the sense of the composition of the next government. There seems to be two potential paths going forward. The first was floated over the weekend of another technocrat government.

And yay verily there was much rejoicing that Italy managed to sell a few billion euros worth of its sovereign debt to its banking system (albeit at the highest accepted yield since October 2012). However, the rejoicing was hardly effusive as bonds and stocks gained only marginally, buoyed by catch-up from yesterday's US equity markets. Swiss 2Y rates remain at zero and EUR-USD basis swaps came back a little but overall this bounce is nothing to celebrate with Italian 10Y spreads still 47bps wider on the week and Spain 23bps wider.

The North American market will put the finishing touches on what has been a generally constructive week for the US dollar. Ironically, the one notable currency that it slipped against is the Japanese yen.  Many had come away from the G20 meeting thinking it gave a green light to sell the yen.

By FXstreet:And the Euro finally left the 1.2900 number as the EUR/USD rose 0.86% on Tuesday to close the session at 1.3016 thanks to improvement in risk appetite. The Euro has advanced 230 pips this week against the Dollar from Monday's low at 1.2800, but as Rabobank's analysts asked in a recent report, "is this the end of the tunnel?"

May was a bad month for U.S. stocks. June started out worse, with the S&P500 on Friday down 9% from where it stood at the beginning of May. That puts us back about where we started the year in January, though still significantly above last fall's lows.

By Alicia Damley:Following a continued weak 2011, the banking sector has been reinvigorated by an unexpected year end gift from the ECB through its first long-term (3 year) re-financing operation (LTRO). With unlimited funding on offer, European banks' liquidity constraints, many of whom rely on wholesale markets for up to one third of their funding requirements, have dramatically eased.

AN ITALIAN Finance Ministry presentation in March 2000 trumpeted the “extraordinary liquidity” of Italian bonds, a result of Italy having, “total outstanding debt [greater] than that of France and Germany together”. In those heady first days of the euro, Italy presented its national debt as a virtue.