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The euro continues trading in mysterious ways on the back of ongoing Greek headlines. And what about the ECB, which helps Greece with the ELA but weighs on the euro with QE?

The team at Morgan Stanley weighs in:

Here is their view, courtesy of eFXnews:

Bearish Greek news being bullish for the EUR puts the ECB in an awkward position, says Morgan Stanley.

“A Greek exit requires loose and not tighter monetary conditions. The higher EUR tightens conditions. In addition, the higher EUR has blocked the currency transmission channel the ECB was hoping to help bring EMU’s economy back to life. Should EMU’s economic performance surprise negatively from here, the ECB is unlikely to tolerate a higher EUR for very long,” MS argues.

“This is why a EUR breakout to the upside does not see us participating beyond very near-term tactical bullish positions,” MS advises.

A Greek Deal Suggests a Lower EUR:

“So far, the Greek government has not shown any significant change to its stance, but all parties are still working towards resolution. Equity market investors may respond positively to an agreement suggesting looser monetary and fiscal conditions. Cross-border flows would increase, pushing the EUR away from its ‘autopilot’, which has seen commercial EUR buying needs calling the EUR shots. A Greek agreement would see the EUR falling again, in our opinion,” MS projects.

In line with this view, MS stays EUR bearish medium-term while running a tactical long EUR/USD from 1.1325, targeting 1.1525, with a stop at 1.1225.  

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