July 5th, 2015
by Michael Grogan, First Class Analytics
(Written 29 June 2015) Over the weekend, there was wide concern that the euro would trend significantly lower this Monday in response to a failure for Greece and the eurozone to reach a significant agreement to compensate for Greece's failure to repay its debt obligations.
However, while the euro did indeed fall to just under 1.10 USD, what has been more astonishing is the rate at which the euro has made back its gains in the space of one day; back up to a level of almost 1.13 at the time of writing. On a one-hour chart basis, I would be looking for a support of 1.11 to confirm that the euro will continue to maintain resistance. In Greece, bar leaving the euro; things seem to have gotten as bad as they are going to get. The Greek government has already had to enforce capital controls on Greek banks to prevent a loss of liquidity, and even the austerity measures being proposed by the eurozone have been met with significant resistance in Greece.
Editor's note (8:02 pm EST 05 July): When the Greek referendum result was announced today the euro dropped more than 1% from 1.111 to 1.098 and within half an hour to just above 1.097. Since then it has traded up and then down between 1.104 and 1.099. The resiliency continues.
With negotiations growing more strained, and even President of the European Commission Jean-Claude Juncker feeling "betrayed" at Greece's "egotism" during negotiations, things are not looking positive in terms of securing an agreed outcome. It could be the case that Greece would decide that leaving the euro is the lesser of two evils, in that austerity measures will be enforced even if the country remains in the euro, but the Greeks would still have the opportunity to devalue the drachma and grow the economy through exports. This is undoubtedly a risk due to inflationary pressures, but increasingly looks to be a risk worth taking.
It is important to bear in mind why financial markets have up till now been viewing a Greek exit as inherently negative for the euro. The main concern is not that Greece will default; but rather that an exit will demonstrate that the eurozone is not a permanent entity, which opens the floor to countries such as Spain and Italy exiting if they so wish. However, we will not know how such events will materialize until months or even years after Greece has departed. In this regard, if an exit proves to be good for Greece and allows the country to recover, then departures by other countries become more plausible. However, if economic turmoil ensues in Greece as a result of a departure from the euro, then other members will be keen to retain the currency to avoid a similar fate.
So, where does this leave the euro? For one, it demonstrates that it is unlikely we will see a large movement one way or the other should Greece exit the eurozone (or at least if we do, we can expect a swift recovery as we have seen for the EUR/USD on Monday). In terms of specifics on the EUR/USD, I would be looking for a support of 1.11 in the coming weeks to affirm the euro's resiliency, and a breakout above the high of 1.14 achieved mid-June would serve as credible confirmation that the euro is set to trend higher.