Euro/dollar saw some excitement with the Spanish bailout but then stabilized in anticipation to the bigger event. The Greek elections are undoubtedly a huge event that will dominate the markets for a long time. Many meetings are planned for after the polls and they might serve as an opportunity to present contingency plans Apart from Greece, there are a few other indicators worth noting. Here is an outlook for the upcoming events and an updated technical analysis for EUR/USD.
Spanish yields touched the 7% for some time in the past week. This is the level that other sovereigns got a bailout. The €100 billion bailout plan seems insufficient and certainly not limited to banks. There are too many holes in the plan. On the other side of the Atlantic, the majority of economic figures continues disappointing. Nevertheless, the current US yields mean that more QE will not have any significant effect, and dollar bears might be disappointed with Bernanke once again. For now, it’s all Greek. Let’s start:
Updates: Very early and unofficial exit polls in Greece show a narrow lead for pro-bailout New Democracy. Many young voters haven’t cast their votes at the time of these exit polls. There is speculation that coordinated central bank action could be announced before markets open. Initial official exit polls show a technical tie between SYRIZA and New Democracy. With votes from younger voters missing, this could be encouraging for SYRIZA. Final exit polls point to a victory for New Democracy, but it’s still too close to call. There was a collective sigh of relief across the Euro-zone late Sunday night, as the New Democracy party claimed a hard-fought, narrow victory after election results were released. The euro climbed as high as 1.2748 following the results, but then retraced as the market euphoria dissipated. The euro was also hurt by the fact that in Spain, government yields climbed above the 7% level, to 7.13%. EUR/USD was moving downwards, trading at 1.2639. There are no releases out of the Euro-zone on Monday, but the markets will be bracing for German ZEW Economic Sentiment on Tuesday. Euro-zone ZEW Economic Sentiment plunged to -20.1 points, its worst performance since January. German ZEW Economic Sentiment was also a major disappointment, falling to -16.9 points. Germany has churned out a host of weak releases, and further poor data will be sure to alarm the markets, which are already jittery. The yield on Spanish bonds continues to rise, with the latest figure reaching 7.27%. Coalition talks continued in Athens, and good progress was reported. The formation of a new Greek government could be announced as early as today. German data continues to disappoint, as PPI contracted by 0.3%. The markets had expected a more modest 0.1% drop. All eyes are on the Federal Reserve, as there is talk (and hope) that the Fed will announce some monetary easing at its policy meeting on Wednesday. Regardless of the Fed’s decision, we could see some reaction from the currency markets and movement by EUR/USD. There was good news out of Athens, as a new Greek government was sworn in on Wednesday. The coalition is committed to the bailout package, but will likely seek some easing of conditions to make it more palatable to the Greek public. The Federal Reserve refrained from introducing any QE, but did extend Operation Twist. German data continued to disappoint, with a set of PMIs falling below the market forecast. French PMIs were better than the market estimates. Euro-zone Current Account posted a reading of 4.6 billion, well below the market forecast of 7.3B. The Euro-zone PMIs practically matched the market predictions. Euro-zone Consumer Confidence will be released later on Thursday. As well, ECB head Mario Draghi will be delivering a speech in Frankfurt. EUR/USD was trading at 1.2690.
- Greek elections: Sunday, initial results expected in the evening, just before markets open. The second round of elections in Greece is one of the most important events for the whole continent and the whole world. The choice is clear: supporting the bailout and accompanying austerity measures and voting for the mainstream center-right New Democracy or voting for bailing out of the bailout and casting the vote for left wing SYRIZA, with its rising star Alexis Tsipras. Other parties seem to have weakened. The winning party gets an additional one sixth of seats, so if it wins one third of votes, an absolute majority is granted. Polls are banned in the last two weeks before the vote, and recent figures showed the race is very close. A win for ND will lift the euro with a big Sunday gap, while a victory for SYRIZA will send it plunging. Another hung parliament, (one of the 3 scenarios for the elections) will also be negative, as the country is already suffering from a “bank jog”, tax deferring, an energy crisis and also medicine is without reach for many. Only a third bailout with a different approach seems to be an option to keep Greece in the euro-zone. An exit from the zone is high on the cards with any result, yet a victory of SYRIZA will likely accelerate the process. The initial reaction might be followed with a strong counter reaction.See how to trade the Greek elections with EUR/USD
- German ZEW Economic Sentiment: Tuesday, 9:00. This is a highly regarded survey of 250 analysts and investors. After many months of gradual rises, the indicator changed course and fell from 23.4 to 10.8 points. Another fall is expected now to 3.6 points – still in positive territory, reflecting optimism. A drop under 0 will hurt the euro. The all-European figure (less important is expected to dig deeper in negative territory and fall from -2.4 to -5.7 points.
- ECB Meeting: Wednesday and Thursday. The ECB has a regular meeting in the middle of the month. In this meeting, no announcement is usually announced. With the events in Greece, the G-20 meetings and the FOMC meeting (detailed in the general weekly outlook), the ECB could make a special decision to cut the interest rate or add liquidity to the system, and come out with an announcement on one of the days.
- German PPI: Wednesday, 6:00. German prices have a significant on the ECB’s decisions. After rising by only 0.2% last month, a drop of 0.1% is expected this time.
- Eurogroup meeting: Thursday. The 17 finance ministers will meet in Brussels for the first time after the Greek elections. Any statements could rock the markets. If there is a decisive outcome in the elections, Greece will already be represented by a new finance minister who is a politician, and not by the finance minister of the caretaker government. These meetings are followed by a meeting of all the EU’s 27 finance ministers on Friday. This may also produce headlines, yet the Eurogroup meeting is likely to rock markets in a stronger manner.
- Spanish audit results: Thursday. An external audit made by consultancy companies on the Spanish banking sector will be published and will give a better picture of Spain’s needs. The initial assessment of 100 billion euros was said to include a buffer. However, other estimates talk about anywhere between 250 to 450 billion euros. We will also get to know if the banking issues are limited to Bankia and small banks that suffer from the real estate boom and bust, or also a bigger bank, as rumors suggest.
- Flash PMIs: Thursday – France begins at 7:00, Germany continues at 7:30 and the figures for the whole EZ are published at 8:00. Purchasing managers’ indicators are forward looking figures, and the initial estimate is very fresh. Separate numbers are provided for the services and manufacturing sectors. Apart from the German services sector, all the other figures are well below the 50 point mark separating contraction and growth. It’s important to note that Germany’s manufacturing sector scored 45.2 last time, not much higher than the figure for the whole continent: 45.1. No big changes are expected and the indicators outside the German services sector will probably stay below 46.5 points at best – deep in contraction territory.
- Current Account: Thursday, 9:00. Thanks to the German export machine, the euro-area enjoys a nice surplus in its current account. This surplus is expected to squeeze from 9.1 to 7.3 billion euros.
- Consumer Confidence: Thursday, 14:00. Eurostat showed a very mild improvement in sentiment last month, from -20 to -19. Pessimism is expected to deepen with the score slipping back to -20 points in this 2300 strong survey.
- Mario Draghi talks: Thursday, 14:00. The president of the European Central Bank is scheduled to speak in Frankfurt at the European Systemic Risk Board meeting, after the ECB meeting. This will provide an opportunity to discuss current events. In the recent press conference following the rate decision, Draghi did not offer anything new and basically passed the ball to the politicians court. Will he change his ways now?
- European mini summit: Friday. The leaders of Germany, France, Spain and Italy will meet in Rome. These are the euro-zone’s 4 largest countries. After a Spanish bailout has already been announced (although full of holes), Italy is also on the line, with a higher debt to GDP ratio and high yields as well.
- German Ifo Business Climate: Friday, 8:00. Germany’s No. 1 think tank also showed a negative change last month, as the score of its business climate fell sharply 106.9. Another slide to 106.2 is expected now. This survey of 7000 businesses tends to be optimistic, so when it disappoints, the impact is strong.
- Belgian NBB Business Climate: Friday, 13:00. Also in the heart of the European Union, things aren’t looking too good: the business climate fell short of expectations and fell in the score in the past 3 months, reaching -11.2 points, reflecting worsening economic conditions. A drop to -11.8 points is expected now.
* All times are GMT
EUR/USD Technical Analysis
Euro USD kicked off the week with a Sunday gap and flirted with the 1.2660 line (mentioned last week). This was short lived, and the pair fell to 1.2440. It then recovered, settled above 1.2540 and eventually closed close to the week’s highs.
Technical lines from top to bottom:
Due to high volatility expected this weekend, we start from higher levels. The round number of 1.30 was a tough line as support, and pro-bailout victory in Greece could challenge this line. 1.2960 is close by, after providing some support before the bigger fall.
1.29 provide support in May and is weak resistance now. 1.2873 was a historic line remains strong . 1.2814 is now stronger after being a clear line separating ranges in May 2012.
1.2760 is a pivotal line in the middle of a trading range seen earlier.. It provided support early in the year and is now of high importance. 1.2670 was a double bottom during January and was the high line of the recovery before the Greek elections in June.
1.2623 is the previous 2012 low and remains important despite recent battles over this line. Below, 1.2587 is a clear bottom on the weekly charts but is only a minor line now.
1.2540 served as minor resistance and also support in June 2012. It is stronger now. 1.2440 provided support for the pair at the same time.
It is closely followed by 1.24. It provided some resistance in June 2010 and is now minor support. 1.2286 is a new minor line of support after being the swing low in June 2012.
Further below, 1.2330 is another historical line after being the trough following the global financial meltdown in 2008. The new 2012 low of 1.2288 is minor support now.
1.22 is minor support below, after serving as such in June 2010. 1.2144 is already a very strong line on the downside: it was a clear separator two years ago, when Greece received its first bailout.
The round number of 1.20 is of course highly important in the psychological level. Below, the 2010 trough of 1.1876 is apparent, before the launch value of the euro at 1.17 to the dollar in 1999.
I turn from neutral to bearish on EUR/USD
Even the pro-bailout camp wins the Greek elections, the situation there is terrible: the state’s coffers are running dry as Greeks defer tax payments and even providing electricity is becoming challenging.. A Grexit seems imminent, it is not fully priced in. Here’s how to trade the Grexit with EUR/USD. As we’ve seen with the Spanish bailout, a rally will likely be short lived.
If SYRIZA wins the euro will plunge and will need coordinated help from leaders and central bankers to stabilize. With politicians digging deeper into their positions, the only hope is from the powerful ECB. But is it up for the challenge? The question remains open.
In the US, if no coordinate action is agreed upon, Bernanke is not likely to act. He said that returns on QE are “diminishing”. This is another factor that can hurt the euro.
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