Eur/usd - page 496
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EU, IMF Creditors Head to Athens to Prod Greek Austerity Progress
Creditors from the European Union (EU) and International Monetary Fund (IMF) will arrive in Athens Monday to begin an audit of Greece’s austerity and privatization program. So far, Greece has been slow to engage reforms, as Europe’s most troubled economy continues to struggle with high unemployment and inconsistent growth.
The second audit of Greece’s austerity agenda, which was negotiated in July 2015 as part of an €86 billion bailout package, will take place just as the first was being concluded. The country’s ruling Syriza party has said it intends to finalize austerity cuts by December 5, when EU finance ministers hold their final meeting of the year.
Creditors this week will engage Athens on labour reforms, including retaining the current minimum wage system that was established by law and not through collective bargaining. However, an anonymous Greek official recently said minimum wages should be backed by collective agreement, a common practice throughout the EU. This is a major stumbling block for the IMF, which has not yet committed to participating in Greece’s third bailout program.
The IMF has remained optimistic about Greece’s economy, forecasting growth of 2.8% next year – that is, if the Greek government implements much-needed reforms.
A recent study from the Bruegel Institute, a Brussels-based think tank, warned that Greece would require a fourth bailout once its current program ends in 2018. Since Greece will not be able to borrow from the markets, it will likely need a fourth lifeline. The IMF maintains that Athens will need some kind of debt forgiveness for Greece to have any hope of recovery. Prime Minister Alexis Tsipras echoed the need for debt relief at a party conference last week.
“The second review will be concluded, and simultaneously the measures must be locked in on debt restructuring. And simultaneously we should enter QE,” Tsipras said Thursday.
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Euro / ECB Exchange Rate Predictions: Will Upbeat Comments Draw Line In Sand For EUR/USD At 1.10?
A potentially reawakened argument over Greek debt relief concerned investors and saw EUR/USD slump ahead of the weekend.
Comments from Greek Prime Minister Alexis Tsipras on the need for debt relief weakened the Euro to US Dollar (EUR USD) exchange rate towards the end of the week’s trading.
His comments threatened to rekindle tensions between the International Monetary Fund (IMF), which wants Greece to receive additional help with its debts, and the Eurogroup, which largely doesn’t.
Meanwhile, strong Chinese and US data helped improve the outlook of both the global and domestic economy, firming the case for an interest rate hike in December.
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On the last Friday’s session the EURUSD dived with a wide range and closed near the low of the day, also managed to close below Thursday’s low, which suggests a strong bearish momentum.
Do to the nature of the impulsive daily candle it can also indicate exhaustion of the downward move. If today the currency closes in the green we will get the confirmation of the exhaustion.
The pair continues to trade well below the 10, 50 and 200-day moving averages that should act as dynamic resistances.
The key levels to watch are: a daily resistance at 1.1237, the 10-day moving average at 1.1116 (resistance), a daily support at 1.1097, July swing low at 1.0952 (support) and a daily support at 1.0900.
EUR/USD closed last week at 1.0970, but today is seen slightly elevated. The pair rebounded from the low to currently trade at 1.0989 and seems that is heading to next resistance at 1.1003.
EUR: How to Trade A 'Quite Dovish' Draghi This Week?
Our base case is that the ECB will confirm that tapering “has not been discussed” and we expect President Draghi to emphasize, as he did at the IMF press conference last weekend, the ECB’s intention to preserve the ECB’s” necessary” and “very substantial” amount of monetary support. We also expect him to highlight that inflation has to return to target “without undue delay” – an expression which is already in the prepared statement but should get more prominence. The tightening in monetary conditions since tapering talk began provides an insight on what would happen if the ECB actually decides to taper from March 2017 onwards. This is why we expect Mario Draghi to be quite dovish this week, though action will likely have to wait until December 8.
We don’t expect Draghi to elaborate much on the instruments, because we think the Governing Council is not through its review of the various options. We still expect the ECB in December to prolong QE until September 2017 at the current EUR80bn pace, and we also think that this will entail tweaking the capital key. Indeed, we think it’s the only credible way to deliver on what seems to be the apparently conflicting twin objectives of the ECB at the moment: keeping long term rates in positive territory without reducing the overall degree of stimulus. A weak form consists of getting the Bundesbank to buy more substitution assets (supras) and less Bunds, which, combined with raising the issuer limit to 50% would be enough to bring us until September. A stronger form would allow the purchasing allowance of NCBs hitting scarcity walls to be redistributed across the other NCBs. The strong form is our base case at this stage, but with a low level of confidence. We see a significant risk that all we get is weak form, given the politically controversial nature of such move.
Looking ahead, the ECB is clearly facing "stimulus fatigue". It is frustrated by the lack of support from the fiscal and regulatory authorities and is probably more worried than it lets out about the long term consequences of ultra-low interest rates on financial stability. This is probably tilting their instincts towards starting to remove the full force of the stimulus as soon as data permits. Our chief concern is thus that a discussion on tapering starts in earnest in the summer of 2017 with a higher chance than today of winning. Then whether or not fragile sovereigns like Italy will have become more sustainable without monetary policy crutches will become the key issue. This brings us back to the fundamental ambiguity of QE, which in the European context is not just a monetary policy tool but has also become a corner stone of the Euro area institutional survival.
FX: Buy EUR Dips Vs JPY
A dovish tone should be negative for the Euro, but we don’t see a sustained impact. Markets already expect QE extension, but will wait for the details that will be clear only in December. EUR/USD has been weakening recently, but this has been a USD move. If the Fed hikes and the ECB extend QE in December, we would expect EUR/USD to stay below 1.10. However, we would see the dip as an opportunity to buy the Euro, particularly against the JPY.
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The euro marked an increase against the US dollar on Monday session. The price bounced back and managed to break the first resistance at 1.0980. The pair added 30 pips to a closing price of 1.0998. The upwards movement continues and the pair is testing now the 1.1100 level.
The euro rised by 0.15 percent to $ 1.1014, moving away from a minimum of almost three months of $ 1.0962 set on Monday, while investors are waiting for the meeting of the European Central Bank later in the week.