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Daily Pivots: (S1) 1.1509; (P) 1.1534; (R1) 1.1574; More...

Intraday bias in EUR/CHF remains neutral as consolidation from 1.1445 is extending. Near term outlook will remain bearish as long as 1.1639 resistance holds. On the downside, break of will resume the corrective fall from 1.1832 and target 1.1355 cluster support (38.2% retracement of 1.0629 to 1.1832 at 1.1372.) At this point, we'd expect strong support from there to contain downside and bring rebound.

In the bigger picture, a medium term top should be in place at 1.1832 on bearish divergence condition in daily MACD. But there is no indication of long term reversal yet. As long as 1.1198 resistance turned support holds, we'd still expect another rise through prior SNB imposed floor at 1.2000.

Market movers today

Focus today will be on the results of the Italian election and news around the US tariffs on steel and aluminium and retaliation.

On the data front, look out for the US ISM non-manufacturing index for February in the afternoon, where there may be some downside risk after a very strong number in January. In the euro area, PMI services (final) and the Sentix index will be out this morning.

The annual National People's Congress (NPC) in China started today and will run for about 10 days. Premier Li Keqiang has presented his work report already and announced that the growth target for 2018 will be 6.5%, but did not use the expression 'or higher' as some had expected. Fiscal policy is also being tightened as it continues to be focused on fighting financial risks and securing a stable outlook. The NPC is likely to approve the removal of the two-term limit on being president, paving the way for Xi Jinping to stay on beyond 2023.

In the Scandies, the key release today is the monthly house price statistics from Real Estate Norway , see Scandi Markets on page 2.

In terms of the rest of the week, look out for the ECB meeting on Thursday , US non-farm payrolls on Friday and a range of Fed speeches , which will be particularly interesting after the US trade tariffs were announced last week.

Selected market news

Market focus this morning is on markets digesting political developments in the eurozone on Sunday. In Germany, the SPD voted in favour (66% of votes) of a grand coalition with CDU/CSU, meaning a new government should be in place over the coming weeks. The development is positive for the German/French reform push and more accommodative fiscal policies, which is why the EUR gained ahead of the exit polls in Italy. At the time of writing, however, the EUR has erased its gains as projections suggest the Italian election will end with a hung parliament. The anti-establishment parties in Five Start and Northern League seem to be the winners complicating the process for a center-right coaliation to get formed. For more information, see our Italian Election Monitor - Eurosceptic shift released this morning.

In Norway , the government announced new regulation on monetary policy on Friday, which adopted two main changes. First, the inflation target was lowered to 2.0% (from 2.5%). Second, financial stability was formally introduced. Overall, the decision on the inflation target has been underway for some time and only the timing was a little surprising. In addition, the overall change in many ways formalised previous practice. Norges Bank's inflation projection (see chart ) implies that the near-term policy impact is modest. We stick to our call for a December hike but believe the probability of a September increase has risen.

As expected, Friday's FX reserve data from Danmarks Nationalbank showed no February intervention. The release did show a sharp rise in government deposits - likely to be a result of pension tax payments - which has implications for DKK liquidity and DGB issuance. See flash comment Denmark: Surge in government deposits but no FX intervention , 2 March.

Masayoshi Amamiya, another BoJ deputy nominee said in confirmation hearing at lowe house:

• Japan's banking system remains stable now
• But the environment surrounding financial institutions is becoming more severe
• Benefits of monetary stimulus outweighs side effects
• Hitting 2% inflation target was more difficult than expected.
• But inflation momentum is on the way

A nominee for BOJ deputy governor Masazumi Wakatabe: Said in confirmation hearing at lower house:

• What's most important is to make a full exit from deflation.
• The BOJ's 2 percent inflation target is effective and meaningful for this purpose.
• Prematurely shifting the BOJ's easy policy could pull Japan back to deflation.

More in Italy election:

"The result of the Italian parliamentary election appears to be a hung parliament, as earlier polls pointed to already. Anti-establishment parties such as the Five Star Movement and Northern League nevertheless registered strong gains, but none of the three major political blocs seem to be able to secure an outright majority. At the time of writing, the Five Star Movement was projected to get around 31% of the votes and the Northern League around 19%, whereas the PD party’s result disappointed with 20%."

A good read here: Italian Election Monitor: Eurosceptic Shift

The result of the Italian parliamentary election appears to be a hung parliament, as earlier polls pointed to already. Anti-establishment parties such as the Five Star Movement and Northern League nevertheless registered strong gains, but none of the three major political blocs seem to be able to secure an outright majority (see chart). At the time of writing, the Five Star Movement was projected to get around 31% of the votes and the Northern League around 19%, whereas the PD party’s result disappointed with 20% (see chart).

At this stage it is difficult to say which party will get the mandate by the president to form a new government, but overall a grand coalition or centre-right coalition together with some smaller parties still seems most likely, in our view. Even in the case of a euro-sceptic coalition of Five Star and Northern League emerging, we still think that the actual euro exit risk is low. However, such an outcome would still be the most adverse one for markets, given the combination of reform roll-back and significant fiscal easing, which could bring Italy’s debt woes quickly back into focus

New elections cannot be ruled out

First coalition debates are likely to be starting behind the scenes already, despite the inconclusive result. The next important date on the election agenda is 23 March, when both houses of parliament will come together for the first time and speakers of the houses are elected, which is a necessary precondition for President Sergio Mattarella to start the formal consultation process aimed at forming a new government. After a deal is found, the new government has to secure a confidence vote in parliament, leaving us to conclude that it is unlikely that we will have a new Italian government in place before May or June this year. Should renewed coalition building efforts fail, new elections held in H2 18 cannot be ruled out either, in our view.

Markets await more clarity

The reaction in FX markets to the eurosceptic shift in Italy so far has been muted, as investors await more clarity on the composition of the next government. EUR/USD trades still around the 1.23 level at the time of writing and the muddy outcome should keep the cross in the recent range, in our view.

In the fixed income market, the Italian election is not a positive for the peripheral spreads this morning, but it is mainly an Italian ‘problem’. Hence, we expect Italy to lose relative to Spain and Portugal as well as the core EU markets. We expect the 10Y spread between BTPS and Germany to open up some 5bp wider on the back of the election result, and given the big gains for populist parties, it is difficult to see this as a positive factor for Italian government bonds going forward. That said, other factors are also at play such as the SPD joining Angela Merkel in a grand coalition in Germany, which will be positive for the EU. Hence, together with the centre-right coalition in Italy winning the most votes but without having a majority, this should limit the potential spread widening between Italy and Germany.

Daily Pivots: (S1) 1.2828; (P) 1.2871; (R1) 1.2924; More....

As noted before, considering loss of upside momentum in 4 hour MACD and proximity to 1.2919 key resistance, intraday bias in USD/CAD stays neutral first. On the downside, below 1.2757 resistance turned support will indicate rejection from 1.2919 resistance. Intraday bias will be turned back to the downside for 1.2614 support first. Nonetheless, firm break of 1.2919 will resume the rise from 1.2061 low and target 1.3065 fibonacci level

In the bigger picture, current development is reviving the case of medium term reversal after drawing support from 50% retracement of 0.9406 (2011 low) to 1.4689 (2015 high) at 1.2048. Break of 1.2919 will add more credence to this bullish case and target 38.2% retracement of 1.4689 to 1.2061 at 1.3065 first. Break will target 61.8% retracement at 1.3685. However, break of 1.2450 near term support will turn focus back to 1.2061 low instead.

The euro currency has reacted positively to the outcome of the weekend’s Italian election and German Referendum results. The EURUSD pair has so far hit an intraday high of 1.2364, as Sunday’s Italian election result showed no conclusive outcome, whilst Chancellor Angela Merkel found the support she needed as the German SDP Party backed her. Traders now look to the release of Eurozone Retail Sales and Investor Confidence data, with the 1.2305 level acting as a vital daily pivot or the EURUSD pair.

The EURUSD pair is intraday bullish whilst trading above the 1.2305 level, further upside towards 1.2364 and 1.2430 seems possible.

Should the EURUSD pair move back below the 1.2305 level, price-action may correct back towards the 1.2278 and 1.2259 support levels.

Daily Pivots: (S1) 0.7741; (P) 0.7757; (R1) 0.7777; More...

Intraday bias in AUD/USD remains neutral for consolidation above 0.7712 temporary low. Again, near term outlook will remain bearish as long as 0.7892 resistance holds. Below 0.7712 will resume the decline from 0.8135 and target 100% projection of 0.8135 to 0.7758 from 0.7988 at 0.7611. Break there will put 0.7500 key support in focus.

In the bigger picture, medium term rebound from 0.6826 is seen as a corrective move. It might still extend higher but we'd expect strong resistance from 38.2% retracement of 1.1079 to 0.6826 at 0.8451 to limit upside to bring long term down trend resumption. On the downside, break of 0.7500 support will now be an important signal that such corrective rebound is completed.

The USDJPY pair continues to consolidate at depressed levels, as risk-off trading sentiment underpins strength in the Japanese yen currency. Price-action is currently trading around the key 105.50 level, after hitting 105.24 on Friday, following U.S President Donald Trump’s promise to impose trade Tariffs sparked fears of a potential Trade War. Asian stock markets have suffered heavy losses in early Monday trading, putting further downside pressure on the risk-sensitive USDJPY currency pair.

The USDJPY pair retains a strong bearish bias below the 105.50 level, further downside towards the 105.24 and 104.90 levels appears possible.

Should the USDJPY pair move above the 105.50 level today, buyers may try to test towards the 105.90 and 106.18 resistance levels.