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Euro takes a step higher ahead of the ECB

FXstreet.com (Córdoba) - The euro advanced against the dollar on Monday after the formation of a government in Italy following months of political uncertainty. European stocks were also lifted by the news, while Italian bond yields fell at an auction to their lowest in over 2 years.

Italy's Prime Minister Enrico Letta and his new cabinet were sworn in on Sunday, forming a coalition government. Meanwhile, Greece approved government labor cuts that will allow the next tranche of bailout funds to be distributed.

"Those developments are seeing peripheral spreads tighter, and have generally added to the positive risk sentiment and helped buoy the EUR despite strong expectations that the ECB could cut rates on Thursday", says the TD Securities team. "Market expectations have turned much more dovish over the past week, with most forecasters (including TD) now calling for a cut".

On the other hand, ING Bank analysts are a bit more reluctant to adopt this view. "A rate cut without additional efforts to repair the transmission mechanism would quickly go up in smoke and could even be regarded as an act of despair", ING team comments. "It is hard to believe that the ECB would first cut rates and come up with a broader SME funding scheme later. It is all about the sequencing".

1.3200 remains as key resistance

Technically speaking, EUR/USD holds a positive short-term tone, having reached a 10-day high above 1.3100 on Monday. However, EUR/USD would need to regain 1.3120 zone (38.2% retracement of 1.3710/1.2746) to confirm a stronger recovery with 1.3200 on sight. This level, which has capped the upside for over 2 months now, is key resistance to overcome. A break above 1.3200 would pave the way toward 1.3340 (61.8% retracement of the same fall) as next target.

However, euro bulls may not hurry ahead of the European Central Bank monetary policy decision. The pair could see a quick drop if it loses the 1.3000 mark. 1.2950 would stand as next support ahead of the 1.2840/50 area.

"The ECB meeting aside, price action in EUR/USD looks quite positive this morning and could extend a little further in the short term", says TD Securities. "1.3120/30 is the nearest resistance spotted on the topside".

Forex: EUR/USD clings to 1.3100

The shared currency is hovering over the key resistance at 1.3100 on Monday, bolstered by the increasing demand for riskier assets. Collaborating with the upside, the USD continues to suffer as market participants...
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