EUR/USD on the verge as new Greek proposals awaited
Fawad Razaqzada July 7, 2015 4:38 PM
<p>The EUR/USD is again sharply lower today as investors await fresh news from Greece. Following the weekend’s referendum which resulted in an emphatic “No” to […]</p>
The EUR/USD is again sharply lower today as investors await fresh news from Greece. Following the weekend’s referendum which resulted in an emphatic “No” to the bailout offer from the trioka and the subsequent resignation of the outspoken Greek finance minister, Yanis Varoufakis, the focus is now on Prime Minister Alexis Tsipras to present a new package of reforms to the eurozone leaders later today.
If a deal is finally reached this week, it is likely that the EUR/USD’s initial reaction will be a positive one. Thus, any positive headlines regarding Greece leading up to a potential deal could support the euro. But once the initial euphoria fades, the EUR/USD may then resume its long term downward trend as investors focus back on the fundamentals and realise that the interest rate differential between the US and Eurozone is growing.
Also, the single currency had been supported by the unwinding of the long equity and bond positions lately, and the corresponding rise in benchmark government yields. But yields have fallen back in recent days and if Greece is “saved”, it is likely that they would fall even further and stocks rally.
Consequently, the EUR/USD may head south as the spread between US and euro zone yields widen. But if the unthinkable happens and Greece exits the euro zone, this too will be bad news for the EUR/USD. Thus, I think that the outlook for the EUR/USD is looking bearish from whichever angle you look at it.
Indeed even from a technical point of view, the EUR/USD appears to be on the verge of a breakdown. Yesterday, the worlds’ most heavily-traded FX pair gapped lower as traders responded to the weekend’s “No” vote in Greece. It spent the rest of the day ‘filling’ that gap before running into fresh selling pressure once it reached Friday’s closing level of 1.1095. From there it has pulled back quite sharply and this morning it momentarily dropped below yesterday’s low.
But things could go from bad to worse if the EUR/USD goes on to break below last week’s low too, at around 1.0950/5. It is likely that a cluster of stop loss orders are sitting below this level. If they get triggered, we may well see a sharp move to the downside. Indeed, the next key support is all the way down at 1.0845, a level which corresponds with the 61.8% Fibonacci retracement of the up move from the March base.
What’s more, price has already broken a bullish trend line and the momentum indicator MACD has created a bearish crossover and is below the “zero” level. But with the above-mentioned fundamentals working against the bulls, we wouldn’t be surprised if the euro went much lower over time. On the upside, the key resistance to watch is yesterday’s high at 1.1095. This level also corresponds with a short-term bearish trend line. For as long as price holds below here, the short-term bias would remain bearish.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.