Euro Crisis Drags On, EUR/USD Slides Below 1.37 as Greek Default Worries Back in Spotlight

FXTimes   |  September 19 2011 6:44 EDT

So it seems that a conference call and the ECB opening up its spigots to pump out US dollars solving a liquidity problem for European banks has not solved the Greece problem.We start this week again with heavy risk sentiment with the euro falling below the 1.37 level as worries again surface around the troubled periphery country.

Today begins, or better restarts, the review by the EU and IMF in regards to whether Greece should get its sixth trench of aid from its original 110 billion-euro bailout. The EU/IMF inspectors had left the country two weeks ago when they found a budget hole in the country’s books, which has been covered up now by a tax on real estate worth around 2 billion.

The Finance Minister of Greece, Evangelos Venizelos, is expected to meet/conference with the inspectors and he has called for some of the measures that were outlined in a five-year 78 billion-euro budget deficit reduction bill to be brought forward. It will be impossible to continue to levy taxes to plug holes in the program as Greece has a very inefficient tax collection system and therefore the questions will be if cuts outlined by Greece such as placing civil workers in “reserve” as well as accelerating state asset sales will be to be enough to convince the inspectors to release the aid.

European financial ministers which were meeting over the weekend did not come up with any new answers in terms of Greece, and kept the pressure firmly on the country to meet its fiscal targets in order to receive its next installment of bailout aid. The lack of any new measures also kept the pressure on European stocks and weakened the Euro.

The Greek economy is now entering its third year of recession and the Greek finance minister has blamed the deepening recession on the country missing its fiscal targets.

While last week’s events including the ECB offering three-month tenders of dollars to European financial companies, and France’s and Germany’s reassurance that Greece should remain in the euro zone helped to give the euro, and risk assets more broadly, a rally, we are seeing that bit of risk appetite to be short-lived and traders back on-edge, and adopting a nervous posture.

While Greek authorities try their best to meet the fiscal targets set out for them, they’re running on a treadmill that seems to keep going faster and faster, and the market is generally pricing in some type of default situation.

Whether Greece gets its aid will be decided at a meeting of European economic finance ministers on October 3rd. Till then we can assume that the euro will be pressure on the uncertainty of the disbursement of that aid.

Today, the EUR/USD has pushed below the 50% retracement of the full upswing from last week’s trading from 1.35 to 1.3930 – and is currently consolidating around the 61.8% retracement. We also see the moving average picture back into bearish alignment with the 21 EMA (in red) crossing below the 55 EMA (in dark blue). The uncertainty hounding the Greek situation can mean that the euro falls further down to 1.36 area and below, though the RSI is showing some oversold levels.

A turnaround in risk sentiment and equities could mean that we have found a natural correction to the upswing from last week, but the market continues to be headline driven.

Next important headlines to monitor will be conference call between Greece’s Finance Minister and the EU/IMF inspectors due for 3 PM Athens time. For the Euro-zone as a whole, tomorrow’s session holds the ZEW economic sentiment indicator which will tell us how institutional investors and analysts see the six-month economic outlook for Germany. The expectation there is for that sentiment to decline. On Wednesday we will get the FOMC decision which should have a major impact currency markets.

We’ll continue to monitor all the latest developments in the euro zone sovereign debt crisis right here on FXTimes.com.

Nick Nasad
Chief Market Analyst
FXTimes

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