Greek Deal Priced into Exchange Rate, Beware any Failure

Greece has not yet signed a deal with its creditors ensuring the risks to the euro complex continue to grown. 

The euro exchange rate complex is today holding its breath - we see virtually no change on the previous night’s close in levels in the euro / pound exchange rate and euro / dollar exchange rate at the time of writing.

The euro to pound conversion is at 0.7116 while the euro to dollar conversion is at 1.1200 - these levels have dominated trade through the latter half of the week and we would be surprised if any major moves occured before Friday's close. 

Presumably there will be some moves between Greece and its creditors ahead of the weekend if the risk of market stresses and panic is to be avoided.

A break of either of these on good/bad news should see respective follow through trading into Monday. "If this is to the topside, we continue to believe that the core fundamental outlook will eventually take over and that the upside should be limited to 1.1650/1.1750," suggests a note from analysts at Lloyds Bank.

"A quiet economic calendar in European hours will keep Greece in the spotlight as Eurozone finance ministers struggle to secure a deal between the country and its creditors. Hopes were running high early in the week after Athens submitted an updated set of proposed reforms meant to unlock a tranche of bailout funding. Traction has failed to materialize thus far however,” says Ilya Spivak, Currency Strategist, at DailyFX.

The outcome of this sorry saga is incredibly important for the euro - Goldman Sachs have said in a recent research note that they are predicating the decline of EURUSD to a 1:1 exchange rate based on a messy outcome.

Meanwhile traders are anxiously awaiting confirmed signs of a breakthrough in negotiations based on hopes Greece will have to relent. 

From a currency perspective there are suggestions that an agreement is priced into the exchange rate:

“The Euro may see near-term gains amid ebbing uncertainty risk. Risk appetite may likewise find support, boosting higher-yielding currencies (notably in the commodity FX complex) while weighing on the safety-linked Japanese Yen. Follow-though may be limited however considering the markets’ priced-in outlook seems to favour an eventual agreement,” says Spivak.

From a short-term perspective, should EURUSD’s negative momentum gain traction, a further sell-off could take the pair down to a distant 1.1040/60 suggests Ipek Ozkardeskaya at London Capital Group citing this target as the Fib 23.6% projection from Apr-May projection on June rise / technical monitor.

"Option offers trail below 1.1150 at today’s expiry, above this level vanilla bids dominate. The volatility is seen two-sided on Greek issues. Against the pound, 0.7070/0.70p is where the next battle between bears and bulls should take place," says Ozkardeskaya.

Calling the euro’s direction based on Greece has however been difficult and traders are instead asked to focus on the longer-term picture.

“Trying to trade EUR on Greece headlines has been a losing battle. This is likely to remain the case near term, with the safer bet probably EUR/USD decline on the Fed vs ECB monetary policy contrast,” notes a strategy piece issued by Sean Callow at Westpac in Sydney.

As such the prospect of a rise in the USD complex from late summer into the year end should see the euro dollar rate edge lower.

For us the question is whether the pair will fall all the way to parity or whether lows in the mid 1.0's will be struck.

To consider the range of views please consult our forecast table here.