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The markets are stuck in a range as we wait for the Italian vote at 1430 GMT. It beggars belief that the euro is testing 1.38 as we lead up to the vote on the back of some very worrying news. Firstly, a report has surfaced that says the ECB may only be able to purchase government bonds until January, unless it changes its mandate. Since new ECB President has made no hints that a Treaty change is on the cards, the Eurozone may lose its last pillar of support unless there is a swift boost the EFSF fund, which is currently too small to protect a country the size of Italy from financial stress.

Added to this, Finnish Prime Minister came out today and said that it is hard to see how Europe could bail out Italy. He said that Italy's main problem was its unreliable decision making. Thus, without firm commitment on fiscal and economic reform from Rome, it could lose support from Europe just when it needs it the most.

Lastly, a report surfaced that said Spanish banks may have an extra EUR60bn of losses on their banks that are not covered by current provisions. If this is true then it suggests that the Spanish government may have to foot the bill for these liabilities, thus aggravating the already stretched national finances and threatening Spain's credit rating.

So why hasn't the euro capitulated? This is hard to answer - the fundamentals scream a short euro position, yet the prospect of QE3 remains on the table in the US, which continues to weigh on the dollar. On a long-term basis the dollar remains close to record lows, in the last few years it has staged rallies only during times of intense stress in the markets before fading back again. This is why the EURUSD reaching parity argument has held no water in recent months: the prospect of more Fed action makes this one a hard boat to float.

This means that EURUSD is likely to be range bound even in the middle of all of this mess. Right now no one, not even the high command in Brussels, seems to know how to solve this crisis. Euro group President Juncker said last night the crisis could take 2 years to solve, Merkel said the region wouldn't sort out its debt problems for a decade or more. If they don't know then what hope do we have to try and second guess what will happen. The only thing that I firmly believe is that today's vote won't bring a neat end to the Italian farce and even if Berlusconi is axed then the opposition won't be able to reform restrictive labour laws or bring about fiscal change quick enough to placate the markets for any length of time. So any relief rallies in the coming days that may (or may not) emanate from Berlusconi's resignation may prove to be short-lived.

But, that's not what the market is focusing on right now and short-term ranges are the order of the day. There is definitely nervousness out there, but according to the latest CFTC report, there are already a lot of people short euro, however there is not enough fresh short interest to topple the resilient single currency, at least not yet while many people wait on the side-lines to see how Italy pans out.

Elsewhere, the new Greek government is set to be announced later today, but the market's focus is no longer with Athens and instead is squarely focused on Italy. Economic data is playing second fiddle to the main event.

The Swissie caused a flurry of excitement. EURCHF fell a staggering 100 pips on the back of comments from the SNB's Jordan earlier today. He said that there was no way the SNB could enforce negative interest rates and that the Bank wasn't keen on pursuing a currency policy that would give Swiss exports an unfair advantage. The market signalled this to be a weakening in the Bank's resolve to weaken the Swissie, although he did say that the Bank would do everything in its power to protect the 1.20 floor in EURCHF. The pair has climbed this afternoon as risk appetite continues to improve.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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