The big story overnight has undoubtedly been the precipitation of a comprehensive bailout package for Greece at the EU summit, in tandem with a series of peripheral measures to help ease the debt crisis contagion that has gripped the Eurozone of late. Earlier rumours that a deal had been struck yesterday afternoon prompted EURUSD to rally sharply from 1.4140 all the way to 1.4400 levels, and equity markets were buoyed across the board, with financials in particular benefitting from the news. The feel-good gains have held overnight, suggesting that the financial markets have finally found enough in the actions of European policy makers to appease their short- and medium- term concerns about the viability of Greece’s future role in the Eurozone. We believe this confidence will persist beyond a mere one-day bounce because yesterday’s commitments address not only the crucial and immediate matter of Greece’s funding needs (and inability to access the money markets), but also a number of other areas previously unexpected by the demanding investor. The main thing markets had hoped to achieve was the bailout for Greece, and ultimately policymakers outlined a near EUR160bn program as required – of which 109bn is expected to come from official sources, with the remainder coming from the private sector. In addition, private sector participants will be expected to engage in bond buybacks and exchanges of currently held securities for longer-dated ones. Furthermore, Greece, Ireland and Portugal will all benefit from maturity extensions and interest rate reductions on their current loan packages (although private sector participation is only envisioned for Greece). Both the EFSF and ESM have been assigned more flexible rules to enable participation in the secondary markets and ability to provide lines of credit to countries before problems escalate to the brink (as it did in this case). One of the most interesting steps taken amongst the summit decisions, has been the commitment to create a sort of “Marshall Plan” for Greece to boost the economy back to growth. The original Marshall Plan (enacted between 1948 and 1952) involved the United States providing large-scale aid to European countries after WW2, in a bid to stimulate economies fatigued and faltering financially after the war. In this case, the European Central Bank is likely to provide the funding for Greece, and policy makers’ aim is clearly to tackle more directly the growth issues in Greece, rather than simply treating the symptoms of the financial market. Ratings agencies are yet to return their verdict on this plan as a whole, but we do feel that the agreements achieved should be sufficient to boost EURUSD up to 1.4500 in the coming sessions. Whether the longevity of this bailout solution is sufficient to avoid such a situation in a year’s time is still up for debate, so we would caution against predictions of EURUSD steaming above 1.5000 for now. Meanwhile, today is the unofficial date that President Obama had hoped to have legislation regarding the debt ceiling ready so that it could pass through congress on 2 Aug, but this looks extremely unlikely to be realised. A New York Times report yesterday suggested a major breakthrough had been achieved on this matter, but this was subsequently contradicted by the White House press secretary.
11:00 CAD Consumer Price Index, % m/m (y/y), Jun; exp: -0.2 (3.6), prev: 0.7 (3.7)
The Risk Today: EurUsd The EU summit conclusions appear to have been heartily welcomed by the financial markets, sending EURUSD on an impressive rally through former resistance levels and up to highs of 1.4439. Next resistance level on the horizon is 1.4467 (6 Jul high), but we feel the power of the current bullish momentum will probably be ample to take us above 1.4500 at least. Beyond there, watch for subsequent pockets of supply at 1.4577 (4 Jul high), 1.4653 (9 Jun high) and 1.4696 (7 Jun high). Given the pace of the rally higher the nearest supports are a long way off, for now the closest ones stand at 1.4175-85 (uptrend support off the 12 & 18 Jul lows), 1.4139 (21 Jul low), 1.4109 (19 Jul low), and 1.4015 (18 Jul low).
GbpUsd The rally in EURUSD has led to big developments in GBPUSD over the past 24-hours, with GBPUSD rally strongly through the 14 Jul high and 3-month downtrend resistance to hit a high of 1.6341. The break of the 3-month downtrend is clearly the more significant bullish signal of the two, and leads us to consider just how far this rally may extend in the coming days. Next resistance comes into play around 1.6384 (15 Jun high) before the topside becomes a little more congested by resistance at 1.6442 (14 Jun high), 1.6472 (7 Jun high), and 1.6496 (1 Jun high). From here we would expect any retracement lower to be met by buyers toward the former downtrend line (currently 1.6190-1.6200), with further pockets of demand seen at 1.6122 (yesterday’s low), 1.6070 (20 Jul low), 1.6006 (18 Jul low), and 1.5906 (12 Jul low).
UsdJpy As predicted by the bearish engulfing candlestick on yesterday’s charts, USDJPY has drifted lower in the past day, taking us to a new trough of 78.22. The progress though has been slow, and we feel the recent uptick in market sentiment is only likely to hinder further downside acceleration in the near-term. Nevertheless, the technical picture still supports our bearish bias. Below us there are scarce few pockets of demand – apart from flimsy psychological levels like 78.00 and 77.00, really the only thing on the horizon is the all-time low 76.40. In the meantime, resistance is eyed at 79.32 (20 Jul high), 79.61 (14 Jul high), 80.38 (12 Jul high), 80.83 (11 Jul high) and 81.05 (15 Jun highs).
UsdChf Unlike the other major pairs, USDCHF has not really demonstrated much directional bias this week, and at the time of writing is only fractionally higher than where it was yesterday morning (around 0.8230). If anything, the very short-term technicals look to favour a return above 0.8300, but our medium-term conviction remains bearish. Rather than try to buy a short-term rally, we would ideally prefer to re-load some short positions up around 0.8330-50 levels. Resistance remains stacked at 0.8278 (Tuesday’s high), 0.8331 (13 Jul high), 0.8398 (12 Jul high) and 0.8526 (1 Jul high), while supports are few and far between. Below last Wednesday’s all-time low 0.8083 print, the psychological 0.8000 level is really the only thing we’d have much confidence in.
Similar Posts:
- Inflation Still A Concern, But RBA Unlikely To Hike Until July
- Hawkish Fed Comments Signal A Key Shift In Sentiment
- ECB Attempts to Fine-Tune Policy
- Nervous Trading Ahead of Thursdays EU Summit
- Talking Forex Weekly FX Wrap – 21/10/11
