Reuters reported yesterday, towards the start of the European session, that Italy’s Five Star party wants the Eurosceptic finance minister candidate Savona withdrawn. The market took this info positively, as it might allow a government to be formed, but that’s only if the League party agrees.
The EURUSD reaction to the news was very positive, closing around 1.1675, up more than 1.2% for the day. Italian yields also reacted positively, with the 10-year yield dropping 29 basis points. Equity indexes in the US and Euro also improved, except for the Euro Stoxx Banking Index, which was flat for the day, probably suggesting the market is still not entirely committed to short term stability.
The volatility on the EUR receded but risk reversals (the relationship between call and put options) still show a relatively higher interest on puts, suggesting there is more interest on hedging a potential downside move in the Euro.
Next levels to watch for the EURUSD will be 1.1676 as short-term resistance while support should be found around 1.1510.