EUR's Weakness Added as Netherlands and Italy Plunged into Crisis

The US dollar index has been rising from the low of 89.209 amid both the Democrats' victories in runoff elections and the soaring US 10-Year Treasury yield. As a result, EUR/USD saw a sharp decline from the peak of 1.2349 on January 6. Besides the strong DXY, other conditions unfavorable to the euro are also on the cards.

Before the Dutch election due March 17, the government of Holland's Prime Minister Mark Rutte collectively resigned. Ministers will stay on as a caretaker government until the general election. It emerged a child benefits scandal between 2013 and 2019, in which thousands of families were wrongly accused of child welfare fraud and told to pay the money back. Many of those affected were left to face financial ruin. In December 2020, a parliamentary report concluded the administrative mistake of tax authorities. Prime Minister Mark Rutte and his entire cabinet resigned to take responsibility for the scandal.

Meanwhile, Italy's former Prime Minister Matteo Renzi announced the resignation of two cabinet ministers, plunging the coalition government into collapse. The political crisis arose from the disagreement between Renzi and Prime Minister Conte on how to use the €200 billion in European Union recovery funds. Financial markets are worried that the country will ultimately hold a snap election. What's more, Germany's ruling Christian Democratic Union (CDU) chose Armin Laschet, premier of North Rhine-Westphalia, as their new leader. Mr. Laschet defeated conservative Friedrich Merz in a run-off vote by 521 votes to 466. Financial markets, however, had expected the result before because Laschet's political style is similar to that of Merkel.

The European Central Bank will hold its first rate-setting meeting of the year on Thursday (January 21). If Lagarde remains dovish and again shows concerns about the euro exchange rate as expected, EUR/USD will see enduring pressures this week. Technically speaking, the pair now has significant support at 1.1920, where a breach below will pave the way for further losses to 1.1603.