The elections in this small island nation are a big event that is highly anticipated by the markets, and the results will be felt for a very long time.
The reaction will likely be a roller coaster. The initial reaction in the markets may turn into a significant counter action. Here is the expected market reaction for EUR/USD. Note that while this article refers to the Euro/dollar currency pair, the same behavior will likely be copied in other “risk currencies”, in stock markets and in commodities, which are all correlated.
Timetable: The vote ends at 16:00 GMT in Greece and that’s when the exit polls are published. The first substantial official results will likely appear around 18:30. At 19:00, markets in Sydney open and that’s when the first reaction will be seen. At midnight, Tokyo joins in and this promises more action. The full action will be seen at the open of the London session at 7:00 GMT.
Scenarios: There are basically three scenarios: a victory of pro-bailout New Democracy, a victory of anti-bailout SYRIZA or yet another indecisive result. More background about the situation is available in the 3 scenarios for the Greek elections. Let’s discuss the impact:
- New Democracy wins – up and then down: This is the expected result according to rumors just before the elections. In this case, EUR/USD is expected to open much higher on this favorable results, with a big weekend gap. However, there is a good chance that the initial cheer will be quickly replaced with a downfall, as seen in the reaction to the Spanish bailout announcement. Why? Greece is in deep trouble, already missing the targets of the second bailout. It also suffers from significant withdrawals from banks, deferring of tax payments, an energy crisis and a shortage of medicine. And let’s not forget, Spain is in deep trouble, and it’s the euro-zone’s fourth largest economy.
- SYRIZA wins – down and perhaps up: This scenario has higher chances, given the momentum the party has in Greece. In this case, EUR/USD will likely open much lower. However, also this downfall will not necessarily last. G-20 leaders are meeting in Mexico from Monday and central bankers also hinted on willingness to act. Up to now, leaders have failed to stabilize markets, and the recent tension between France and Germany comes at a very bad timing. The world needs leadership now. Hopefully, the higher chances of the dreaded Grexit might push them to action. Rumors about coordinated action to flood the markets can stabilize the markets on their own, without real action.
- Hung parliament – steady grind down: This is what happened in the first round of elections. It will take time until all the votes are counted. Coalition talks will also take time. During this time, markets will likely be very worried and Greeks will continue withdrawing funds and avoiding tax payments. Also world leaders will await a Greek coalition before they action. EUR/USD is likely to open lower, and chop its way down as time passes by.
Are you planning to trade this big event? If so, what are you planning to do?
Further reading:Get the 5 most predictable currency pairs