EUR/USD has lost some ground despite optimism about a resolution for Greece. Is it going back to fundamentals?
The team at Credit Agricole discusses the state of the pair:
Here is their view, courtesy of eFXnews:
As relief rallies go, The reaction in EUR/USD to the latest signs that Greece and its creditors are inching closer to a deal is rather underwhelming.
This could be due to lingering uncertainty about the deal. Indeed, various media reports have highlighted creditors’ concerns that the new proposal is putting too much emphasis on new taxes (on both businesses and households) to balance the books. Excessive taxation could hamper the Greek economic recovery and make the proposal less credible.
In addition, there are concerns that the proposed VAT and pension reform could erode the support from Syriza’s main coalition partners – the Greek Nationalist – when the measures are put for a vote in the Greek parliament.
While investors’ cautiousness could explain some of the recent EURunderperformance, the contrasting response of the FX and the European stock and peripheral bond markets may also indicate that investors have moved away from Greece to re-focus on the lingering policy divergence between the increasingly hawkish Fed and persistently dovish ECB. Indeed, a Greek resolution will arguably make it easier for the FOMC to hike rates as soon as September.
At the same time, the ECB remains very committed to QE and this should continue the make the EUR an attractive funding currency.
In addition, we suspect that renewed inflows into the Eurozone stocks and bondd could lead to renewed selling pressure on EUR in the forward markets.
The above could suggest that EUR/USD could be offering attractive selling opportunity at current levels.
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