Euro/dollar continues to weaken, as the political crisis in Greece deepens. Marathon negotiations to form some kind of unity government haven’t succeeded so far, and fresh elections seem likely. Talks about preparations for a Greece leaving the euro-zone are getting louder, and are making the nervous markets even more jittery. German and Eurozone Economic Sentiments were big disappointments, as both posted figures well below the market estimates. The markets will be busy digesting additional European and US releases, with the most important being US CPI and Retail Sales.
Here’s an update on technicals, fundamentals and what’s going on in the markets.
- Asian session: The pair moved as high as 1.2856, and then edged downwards, consolidating at 1.2845. The European session has been quiet, with the pair trading at 1.2847.
- Current range: 1.2760 to 1.2873.
- Further levels in both directions: Below: 1.2760, 1.2660, 1.2623 and 1.2587.
- Above: 1.2873, 1.29, 1.2960, 1.30, 1.3050, 1.3110, 1.3165, 1.3212, 1.33 and 1.34.
- For a second week in a row, a weekend gap is seen. This gap wasn’t closed quickly (again) and this is a bearish sign.
- 1.2873 was breached by the pair on Monday, and is currently providing weak resistance.
- 1.2760 is the next support level.
Euro/Dollar has edged lower on weak economic sentiment data – click on the graph to enlarge.
- 5:30 French Prelim GBP. Exp. 0.0%. Actual 0.0%.
- 5:30 French CPI. Exp. +0.3%. Actual +0.1%.
- 6:00 German Prelim GDP. Exp. +0.1%. Actual +0.5%.
- 6:45 French Prelim Non-Farm Payrolls. Exp. -0.2%. Actual +0.1%.
- 8:00 Italian Prelim GDP. Exp. -0.6%. Actual -0.8%.
- 9:00 German ZEW Economic Sentiment. Exp. 19.1 points. Actual 10.8 points.
- 9:00 Euro-zone Flash GDP. Exp. -0.2%. Actual 0.0%.
- 9:00 Euro-zone ZEW Economic Sentiment. Exp. 11.7 points. Actual -2.4 points.
- All Day: Euro-zone ECOFIN Meetings.
- 12:30 US Core CPI. Exp. +0.2%.
- 12:30 US Core Retail Sales. Exp. +0.3%.
- 12:30 US Retail Sales. Exp. +0.2%.
- 12:30 US CPI. Exp. +0.1%.
- 12:30 US Empire State Manufacturing Index. Exp. 9.3 points.
- 13:00 US TIC Long-Term Purchases. Exp. 19.4B.
- 13:30 FOMC Member Duke Speaks.
- 14:00 US Business Inventories. Exp. +0.5%.
- 14:00 US NAHB Housing Market Index. Exp. 26 points.
For more events later in the week, see the Euro to dollar forecast
- Greek Impasse Continues: Negotiations are continuing but so far all three of the party leaders have been unable to form a government. A unity government to renegotiate the bailout seemed close as moderate Democratic Left was willing to join mainstream parties, but it conditioned it on the participation of SYRIZA – the radical left-wing party that wants to cancel the memorandum. SYRIZA, which came out second in the elections, is enjoying higher popularity and prefers elections. There still might be some agreement, but for now, a second round of elections seems likely on June 10th or June 17th.
- Grexit Rumors Rife: There are reports that Vodafone is sending cash deposits from Greece to Britain every night. German finance minister Wolfgang Schäuble, who plainly told Greece it has to chose between staying or leaving, mentioned preparations for a Grexit by his ministry. ECB member Patrick Honohan of Ireland said the impact “could be technically managed” but would hurt confidence in the zone. Also his colleague Luc Coene of Belgium discussed this opportunity. It would not be surprising if Greece is already secretly printing drachmas. All of these moves are undermining confidence in the Euro-zone, and the euro could continue to slump if matters are not resolved quickly.
- German Government Again Defeated in Regional Elections: For a second consecutive week, Merkel’s CDU party is defeated in local elections. Yet this time, it’s the largest state: North Rhine Westphalia, home to 20% of Germany’s population. Merkel’s candidate, Norbert Röttgen, campaigned on austerity measures, but was handily defeated and resigned. This doesn’t bode well for Merkel’s austerity drive.
- Spain Working on Plan C: Only days after Spain nationalized Bankia and introduced new measures for the banking system, it was revealed that a plan for a worsening situation is underway. Spanish 10 year bond yields are leaping to 6.26%, with the spread from German benchmark bunds reaching 4.77% – these are extreme levels. With Spain already in recession and suffering from 24% unemployment, the economic situation appears to be going from bad to worse.
- Merkel and Hollande Kick Off: François Hollande will start his presidency on Tuesday morning and fly to Berlin in the afternoon to meet Angela Merkel. The first meeting might be difficult due to the anti-austerity path Hollande is leading now, but eventually Germany will have to bend. With the situation in Europe worsening by the day, the leaders of the two biggest economies in the Eurozone cannot afford to bang heads, and some kind of joint action will have to be taken. With Merkel favoring austerity and Hollande promoting growth, it clearly will not be a match made in heaven.
- Deeper Recession in Europe: The European commission left the contraction forecast unchanged at 0.3%. But the details make a difference: Germany is expected to grow by 0.7% (up from 0.6%) while Spain is expected to squeeze by 1.8%, much worse than the previous estimate of 1%. Any further weak economic data out of the Euro-zone is likely to send the euro tumbling some more.
- US Economy Improving (slowly) : The data from the US is mixed, but still pointing to growth, contrary to the old continent. The recent good news is that jobless claims are back to previous levels in the very sensitive job market. US indicators this week will probably have an impact on EUR/USD.
- QE3 Move by Fed Unlikely: Balance sheet measures are still on the cards (QE3) according to the Bernanke, but a significant deflation or no growth can revive the chances of more dollar printing. QE3 is currently on the back burner. A “hands off” policy of low interest rates for the foreseeable future may not make for dramatic moves in market, but it is supportive for the greenback.