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The plot thickens around the Greek crisis and the clock continues ticking quickly. How will this affect the euro?

The team at Goldman Sachs  lays out the scenario and see the risk reward tilted firmly to the downside:

Here is their view, courtesy of eFXnews:

In a note to clients today, Goldman Sachs discusses how EUR/USD will trade for different outcomes in the Greece negotiations.

3 scenarios:

To start with, GS distinguishes between three scenarios: (i) an extension to the current program is announced in short order; (ii) the current program ends on February 28 and Greece enters a grey area, which could see Greece remain in the Euro but might involve ELA suspension and the use of IOUs to pay government employees and pensioners; and (iii)outright Euro exit.

EUR/USD trading on the 3 scenarios:

1-We don’t think EUR/$ will go much above 1.1450 in the event of scenario (i);

2- conversely, scenario (iii) would likely see substantial EUR/$ downside, we pencil in a 5 big figure instantaneous drop in EUR/$ on announcement and then a continued sharp move lower in subsequent weeks (parity would not be out of the question), not least since Grexit would represent a severe deflationary shock, to which the ECB could well respond with additional easing;

3- we see scenario (ii) as solidly in the direction of EUR/$ lower, with a drop of something like 2 big figures on ELA suspension and a continued drift lower in subsequent weeks,” GS projects.

Conclusion:

In short, we see risk-reward tilted firmly to the downside for EUR/$ from here….Our central case is that a compromise will be found, whereby we end up in scenario (i). But the governance problems in the Euro area and the resulting growth crisis remain, which we think is the debate Europe (and markets) should be having,” GS concludes.

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