EURUSD: Stay Short as Markets Test Greece Plan
The Euro ended last week on a strong note after EU leaders introduced an IMF-assisted plan for a bailout of Greece if Athens asks for assistance. The episode exposed deep divisions within the Euro Zone, with Friday’s knee-jerk rally likely to reverse amid concerns about what the outcome means for the EU’s handling of potential future crises in larger countries. Indeed, the sloppy response to issues in a small member state like Greece – just 2.6 percent of the EZ economy – invites decidedly unfavorable expectations about the kind of havoc that could be caused if a country like Spain (11.8% of EZ GDP) or even Italy (17% of EZ GDP) meet a similar fate.
Surely, the idea behind the EU plan was to allay investors’ fears enough to push Greek borrowing costs down to more manageable levels, allowing the government to sustainably finance its obligations in the marketplace. The markets, on the other hand, seem intent to test the EU’s resolve by forcing it to actually go through with the bailout, with the yields on Greek 10-year notes ticking higher to start the week, hinting that near-term Euro performance will be closely linked to how quickly policymakers step in.
I initially sold EURUSD at 1.4881. Last week, the pair surpassed my latest objective at 1.3404 and I revised the soft target level down to 1.3191. Prices have now recovered to test 1.35 but against the fundamental backdrop, this and anything shy of a break above the upper boundary of the falling channel guiding prices since early December (now at 1.3616) looks corrective and I will remain short. A stop-loss is set to trigger on a daily close above 1.4029.
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