EUR/USD rallied hard last week, but then retreated. Greek worries and the strengthening of the US dollar help push the pair lower.
What’s next? The team at Credit Agricole point to the selling points:
Here is their view, courtesy of eFXnews:
Since hitting a multi -week low at 1.0521 in April, the EUR has been rebounding. It appears that most of the past few weeks’ upside can be traced back to delayed Fed rate -hike expectations. Elsewhere, an improving Eurozone outlook has seemingly fuelled fears about the ECB turning less aggressive on QE and has led to the unwinding of EUR -funded carry trades. It also appears that investors expect Greece and its creditors ultimately to agree on a deal , and avoid a ‘Grexit’.
That said, we doubt that the fundamental outlook for EUR/USD has changed materially in recent weeks. We view the latest rally as a positioning correction more than anything else. Fed –ECB policy divergence remains in place.
We think that markets are too complacent with regard to Greece. In particular: – We doubt that the ECB would agree to extend ELA further if Greece were to miss its upcoming payments to the IMF and especially the ECB itself. The Governing Council determines the amount of ELA on a weekly basis as well as the collateral haircut applied. In effect, Greek banks’ and the government’s ECB funding could slow to a trickle if Athens fails to meet its financial obligations.
–In addition, even if Athens continues to treat arrears as ‘soft’ claims, it will need external assistance for the payment of EUR6.8bn bonds held by the ECB due in July and August. The Eurogroup meeting on 19 June seems to be the real ‘hard deadline’ for Greek officials and we suspect that their brinkmanship could come to the fore in the run-up to the meeting. We cannot rule out a referendum on the proposed reforms and further political uncertainty in the troubled Eurozone member.
—Last but not least, we worry that markets are ignoring the fact that Greece will need ever more funding for the coming years. Underwhelming tax revenues have already pushed the government’s primary surplus well below the target set under the second bailout agreement. In turn, this suggests that the Greek debt-sustainability issue will resurface soon and call for debt forgiveness/restructuring as well as additional fiscal austerity measures. Needless to say, such an agreement may not be possible with the current Syriza government. Indeed, we cannot rule out the risk of snap elections in Greece in the coming months. Our concerns are further underscored by the growing reluctance of creditors to soften their stance towards Greece. The scope for compromise may diminish even further given that Euro-sceptic parties like the True Finns seem poised to join the new Finnish government.
We think that, while the squeeze may continue for now, EUR/USD levels around 1.1500 could offer interesting selling opportunities.
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