Euro Exchange Rates and Greece: Beware EUR Gains

The euro exchange rate complex entered the weekend static as all eyes fixed on the Sunday referendum in Greece and subsequent developments once the result is made known.

Calling direction in the euro exchange rate family is incredibly hard when it comes to Greece; this difficulty is confirmed by the currency’s reaction in the aftermath of last Sunday’s events.

The euro plummeted as Asiam markets opened only to recover through the day with strong gains being recorded at close.

For now though the EUR treads water in familiar and seemingly unbreakable territory:

• At the time of writing the pound to euro exchange rate (GBPEUR) is at 1.4077.
• The euro to dollar exchange rate (EURUSD) is at 1.1106.
• The euro to Swiss Franc exchange rate (EURCHF) is at 1.0460.
• The euro to Australian dollar exchange rate (EURAUD) is at 1.4772.

Remember the above quotes are taken from the inter-bank markets, when making international payments you are given a discretionary rate by your bank. An independent FX provider can get you closer to the market and deliver up to 5% more FX in many instances.

The Euro and Upcoming Greek Events: Up or Down?

There is certainly a sense that we are in the calm before Monday’s storm.

“It is becoming increasingly difficult for the Greek Finance minister Yanis Varoufakis to say something that will surprise market watchers, so his latest comments that he sees a 100% chance of an agreement being reached within 24 hours of the Greek referendum is not so much being viewed as crazy as just par for the course,” notes Alastair McCaig, a Market Analyst with retail trading providers IG in London.

The reaction of Varoufakis and co. to the referendum’s result is potentially critical to how currency markets react.

IG’s referendum binary is still strongly pointing to a ‘yes’ victory, and at 67% suggests that a number of Syriza ministers could well be stepping down next week.

“Our biggest concern initially was that even on a 'Yes' vote, the Syriza government might have been unwilling to step down. Comments this week seem to confirm Tsipris and Varoufakis would resign, which should limit that risk. Now, the biggest political questions we face centre on the post-referendum landscape,” says Richard Kelly at TD Securities.

Will Syriza agree to work in a national unity government or does the party split along ideological lines? 

Some faction of this left-wing party might agree to work with one or more alternatives (New Democracy, PASOK, or To Potami) in forming a weak minority government.

“Ultimately, this could produce a more stable - and therefore positive - outcome for the euro.

If Syriza remains intact and refuses to participate with a unity government, however, we expect a much more difficult road ahead,” notes Kelly.

We see such an outcome as being negative for the euro.

A weak minority government could be the end result, this would complicate the relationship with creditors even further and could hasten early elections.

Early elections would only extend the problems surrounding Greece and we could be in ‘for more of the same’ over coming weeks and months.

“On a 'No' vote, however, the future will be much more uncertain. Syriza could still fracture and lead to a unity government. More likely, perhaps, they would take a No as a mandate to dig in their heels. This scenario leads to protracted uncertainty as creditors are unlikely to compromise,” says Kelly.

Exchange Rate Forecasts on Greek Events

Putting numbers on the potential outcome is Asmara Jamaleh, an economist at Intessa Sanpaolo:

“The reaction of the exchange rate cannot be taken for granted, but in any case should not be affected by the size of the gap between “Yes” and “No” votes. It seems more likely that, following last Saturday’s fall-out of talks, the single currency could recover in case of a victory the “Yes” campaign.

Upside margin should stay limited to within EUR/USD 1.13-1.14 with important resistances in the EUR/USD 1.12 area. If on the other hand the “No” campaign prevails, there could be a correction, to within EUR/USD 1.09-1.08.

“In any case, the retreat should be limited, as assuming a potential victory of the “No” camp does not lead to Greece’s exit from the euro, the possibility of reaching a compromise agreement would re-open.”

UniCredit meanwhile tell clients they see a stronger euro emerging:

"In case of a Yes-vote by the Greek population, confidence in European markets should resume. But it is a close call and price action will remain choppy amidst thin liquidity. From a medium-term perspective, we maintain our constructive view for EUR-USD, based on the favorable economic developments in the eurozone. In the US, the start of the US earnings season will likely show earnings growth slowing down which may raise concerns about the impact of the strong dollar."

For the pound to euro exchange rate (GBPEUR) we reckon it would take a substantially negative outcome to push values back towards 1.43 and above.

We are seeing buying interest dry up the second these areas are met and a subsequent slump back to well-treaded ranges below 1.42 is highly likely.