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EUR/USD Forecast July 13-17
EUR/USD traded according to Greek headlines for another week, and managed to end it on a positive note, as a deal finally seems close. Apart from a potential end to the deep crisis, we will also hear from a key player in the criis: the ECB, in its rate decision, among other events. Here is an outlook for the highlights of this week and an updated technical analysis for EUR/USD.
The week began with another gap to the downside on the clear NO vote in the Greek referendum. From there we had another fill of the gap and tense trading as preparations were made for what seems as the real deadline: the EU Summit on Sunday. Pressure for debt restructuring mounted and eventually Greece submitted its proposals, which consisted of a capitulation on austerity but also a request for a longer plan, an investment plan and most importantly debt relief. This triggered a relief rally, but we need to be cautious before saying the story returns to the back burner. There are troubles in the talks during the weekend.
Apart from Greece, German factory orders disappointed but the Sentix investor confidence surprised with a rise. In the US, a miss on jobless claims was dismissed. The Fed minutes showed caution towards a rate hike and were dovish in general, citing also Greece.
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Schaeuble Greek Exit Idea Gets Qualified Nod From Merkel Deputy
The idea of a temporary Greek exit from the euro, reprised Saturday by Germany’s Finance Ministry, won qualified support from Chancellor Angela Merkel’s deputy, signaling broader acceptance for such a step within her government.
Vice Chancellor Sigmar Gabriel, the chairman of Merkel’s Social Democratic coalition partner, said Finance Minister Wolfgang Schaeuble’s plan for a five-year “time out” for Greece outside the euro was “known to the SPD.”
“In a difficult situation such as this, every conceivable proposal must be examined without prejudice,” Gabriel wrote early Sunday on his official Facebook page. “This proposal would only be achievable if the Greek government itself views it as the better alternative.”
Merkel’s Chancellery declined to comment on the plan, though Deutsche Presse Agentur on Saturday reported that everything Schaeuble negotiates with the euro-area finance ministers is signed off by Merkel. Deutsche Presse Agentur didn’t cite how it got its information.
First reported by Frankfurter Allgemeine Sonntagszeitung, the one-page position paper deemed Greece’s efforts toward a new bailout insufficient and presented two scenarios: either Greece quickly present a more robust plan and agree to more stringent oversight, or euro-area nations would provide assistance during a five-year suspension outside the single currency.
The plan was dismissed by an EU official in Brussels as legally unfeasible and not serious. The official, speaking anonymously, called for a serious discussion and solutions, not for recycling academic, non-practical ideas.
The German paper was discussed at a lower level and wasn’t presented to the 19 finance ministers, who didn’t discuss a Greek-exit scenario.
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Germany Pushes for 'Temporary' Grexit If No Deal Agreed
A four-page proposal prepared by euro zone finance ministers during their Eurogroup meeting suggests that Greece could opt for a "temporary" exit from the euro bloc if it doesn’t agree a deal with its creditors on Sunday.
The proposal is the very same idea prepared by the German Finance ministry and mentioned in German media over the weekend.
"In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring," the document says.
However, the Eurogroup document clearly indicates that finance ministers couldn’t find consensus on this issue and it ended up with the leaders. It is also curious that some ministers had told reporters that Grexit was not discussed last night and that the German paper was not distributed, but there is the reference to this point.
France's President Francois Hollande resolutely dismissed the idea of a temporary Grexit ahead of the leaders summit.
"France will do everything to find an agreement this evening, talks are not just about Greece but Europe," Hollande said, adding: "It's either Grexit or no Grexit."
Several independent experts quoted by media have already ridiculed the idea as full of problems: "it reduces the euro zone to a mere currency peg" is the main line of thinking.
Germany determined to force Grexit
The British Guardian is quoting economics Professor Karl Whelan, of University College Dublin, who analysed the proposal:
1.The inclusion of the temporary exit option shows that this is still the German position.
2. This document is going to heads of state. It is not credible that this is not the agreed German government position i.e just Schäuble's.
3. No haircuts inside euro but a "possible restructuring" if Grexit is a huge sweetener designed to boost support for Grexit in Greece.
4. The offer of restructuring outside the euro but not inside has got nothing to do with the provisions of the Treaty.
5. Germany has an effective veto on ESM loan agreements. German strategy appears to be to set conditions that won't be met and force Grexit.
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Euro Zone Plays with Fire
Euro zone leaders from Greece and 18 other member countries as well as heads of the European Central Bank (ECB) and International Monetary Fund (IMF) gathered on Sunday to discuss next steps and measures for Greece to receive funding via a new 3-year loan program. Their meeting is following talks between euro zone finance ministers who had agreed on a common statement at their two-day Eurogroup gathering and sent their recommendations to the leaders' summit.
Staggering demands
However, even independent economists, analysts and observers are stunned by the scale of the measures considering the fact that Greece already went beyond its creditors earlier demands last week. A euro zone official present at the meeting characterized the pressure applied on Prime Minister Tsipras as "extensive mental waterboarding."
Apart from the Greece's own proposal that has already been approved by the Parliament, the euro zone plan forces Greece to adopt extensive reforms and further austerity measures by Wednesday night, including streamlining VAT, broadening the tax base, sustainability of pension system, adopting a code of civil procedure, ensuring legal independence for Greece's statistic office ELSTAT, full implementation of automatic spending cuts and meeting bank recovery and resolution directive.
It should also start proceedings on another measures: privatizing electricity transmission grid, taking decisive action on non-performing loans, ensuring independence of privatization agency TAIPED, de-politicizing the Greek civil administration and returning hated creditors' officials to Athens.
Otherwise the country could be offered a so called ‘temporary Grexit’ along with a possibility to restructure its debts.
In addition, the demands include Greece surrendering €50 billion in "valuable assets" to a euro zone agency which would sell them off to recover Greek debt.
Domestic compulsions
It is not clear whether prime minister Tsipras can gather support of his own Syriza and his junior coalition partner Independent Greeks (ANEL) lawmakers, considering the fact that 17 MP's from the governing coalition voted either no or abstained during the vote on earlier, less demanding measures. 15 other legislators have already indicated that they would not support the entire deal.
Some political analysts suggest that the proposals aim at regime change in Athens. European Commission President Jean-Claude Juncker convened a meeting with some Greek opposition parties on Saturday in Brussels.
The current situation raises a possibility that Tsipras will be forced to call fresh elections, a step that could be disastrous for the country.
ANEL leader, Defense minister Panagiotis Kammenos, has already raised a spectre of a civil war in the broken, debt-ridden and impoverished country. He said on Friday ahead of the vote on the reforms package that he was not worried about Greece's exit from the single currency bloc but the threat of a complete social breakdown and possible civil war.
"I'm not afraid of Grexit but I'm afraid of national division and civil war," Kammenos said.
Cracks in European unity
More worrying signs are coming from within the euro area. Several countries, including France, Italy, Luxembourg and others urged Germany to reconsider its objections.
“Grexit has to be prevented,” Jean Asselborn, the Luxembourg foreign minister told German newspaper Süddeutsche Zeitung. “It would be fateful for Germany’s reputation in the EU and the world."
"Germany’s responsibility is great. It’s about not conjuring up the ghosts of the past,” he added. “If Germany goes for Grexit, it will trigger a deep conflict with France. That would be a catastrophe for Europe.”
Officials present at the euro zone meetings mentioned also an unpleasant exchange between ECB President Mario Draghi and Germany's Finance minister Wolfgang Schaeuble.
"Do you hold me a fool?" Schaeuble reportedly challenged Draghi during the Eurogroup meeting.
However, Greek officials gave credit to Draghi for being "very supportive."
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EU summit reaches an agreement on Greek deal
So says the Belgian PM on ReutersThe French PM Valls also says the latest information received points to a deal but says "let's be cautious"
Euro surging on the news as are Eurostoxx futures
Bond yields falling
Draghi leaves without making a comment but EU press conference scheduled shortly
Extremely volatile session recorded the euro against the dollar on Friday. After all the trade concluded in favor of the single currency. The start was given at a price of 1.1034 as bullish sentiment dominated. A powerful upward momentum was recorded around noon when currencies peaked for the day at 1.1214 and so did test of resistance at 1.1240. However, the pair failed to overcome these levels and finished a course of 1.1144. Although the future direction depends mainly on the development of the crisis in Greece, short-term expectations are in favor of the euro.
On Friday session the EURUSD rose running into the 50-day moving average and closed in the green near the high of the day but below the 50-day moving average. The Greek drama “ended” this Monday morning although Greece has until Wednesday to pass the new proposals through parliament before negotiations for a bailout can begin.
EUR/USD faces another drop in the begining of the week with the Greece crisis getting more complicated.
EUR/USD: Euro Declines Below $1.10 After German CPI
The euro is trading in a tight range, hovering below the $1.10 handle ahead of a rather busy European session.
A set of German data are in focus today, with June CPI already released. Consumer inflation declined 0.1% on a monthly basis, while it confirmed a 0.3% increase annually.
The euro swung below $1.10 after a previous choppy session, and was seen 0.22% lower at $1.0973 following the German CPI.
Later, ZEW Economic sentiment is expected to retreat to 29.0 in July from 31.5 measured in June, while the Current Situation Index is also expected to decline to 60.0 from 62.9 in the previous month.
Any bolder upside moves on the EUR/USD are capped by stronger USD. With Greece finally coming to an initial agreement with the Eurogroup, "the market feels this will be taken well by the Federal Reserve and with the market only pricing in eight basis points of tightening for the September meeting, many are too underweight the USD ahead of ‘lift-off’," Chris Weston from IG wrote in a research note on Tuesday.
Fed Chair Janet Yellen remains of the opinion that in 2015 it will be appropriate to increase rates. A further testimony this week at the semi-annual Humphrey Hawkins will be watched closely by nervous USD longs.
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Yesterday the EURUSD initially tried to rally but found yet again selling pressure, at the 50-day moving average, to give all its gains back to the market and close near the low of the day with a wide range day. Key levels to watch today are: a daily resistance at 1.1097, Fibonacci levels the 38.2% (resistance) at 1.1058 and the 50% (support) at 1.0955.