I am intrigued by the move in the Euro, moving stronger when all sense says the Italian referendum vote is a negative and the Austrian Presidential vote is an escape (the winner is still a fringe candidate). I have copied a quote from Reuters report this evening. The bounce was chiefly down to over-extended bets against the euro, traders said, with investors choosing to cash in gains and lighten their short positions ahead of Thursday's European Central Bank policy meeting. "I think the euro is going to strengthen a lot now. I think it is way oversold," said Nick D'Onofrio, chief executive at London-based hedge fund North Asset Management. My question, did the charts show an over extension or is this reverse logic to explain the unexplainable reaction? With uncertainty one might expect the dollar to continue to strengthen and gold to go with it for the risk haven, first reaction to the Italian vote followed this path then as Europe opened, then US, all changed. Is this "go figure" or was it all in the charts! Yours Confused

Eoin Treacy's view

Thank you for this question which may be of interest to other subscribers. As a veteran subscriber you will have seen us comment about bear markets before and may recall this maxim: A crisis needs to be seen to be getting worse for it to continue to have an increasingly bearish impact on prices. The Italian referendum highlights the disaffection of the Italian electorate with Mario Renzi but since there is not going to be an election that is about all we can say. That was already priced in with the Euro falling from $1.10 to $1.05 over the last month and the situation did not get worse immediately after the vote. 

Of course that does not mean it won’t get worse later. After a decade of belt tightening voters are likely to favour candidates with a fiscal stimulus agenda. That’s why the French election is going to be so important. It is going to pit a hard line fiscal discipline candidate touting more of the same against a populist spender from a party with an anti-immigrant agenda and a tawdry past. How France votes could create a major challenge for Germany. If Le Pen wins Germany will have to get on board with Eurozone wide fiscal stimulus or there is a possibility France will hold its own referendum about leaving. 

Against that background the Euro has capacity to embark on an additional short covering rally but a sustained move above $1,13 would be required to question the medium-term downward bias.