It is difficult to get an accurate read on the euro. This morning, risk appetite has recovered a little from its recently depressed levels; but this does not mean that conditions have improved meaningfully in the background. Particularly for the euro, the direct fundamental connections and the sentiment-based implications of the Greek crisis still loom large. While market sentiment itself can amplify the effect that this lingering issue can have on the currency; none of the various economic outcomes for this event look good. Greece has a long history of deficit – and keeping within EU limits while the economy itself is struggling and the broader region’s progress does not seem feasible. This leaves just a few undesirable options. First, the group can bail Greece out and invite moral hazard into the picture (what about Ireland who has taken the difficult and necessary steps to bolster their economy). Another option is to allow the nation to default which would set the economy even further back and pressure the credit rating of the broader Euro Zone. Then there is Greece’s withdrawal from the Euro Zone. An unlikely outcome; but one that would solve both sides’ problems and likely shake the very foundation of confidence in the single currency.
This is a long-term fundamental assessment of the currency; but one that is nonetheless essential to keep in mind when trading the euro. For my EURJPY short, this is perhaps a fundamental picture that does not fit very well. Since this pair is highly sensitive to risk trends and changes in underlying sentiment can be exceptionally volatile, I may look for a nearby exit. Should the pair move above 125 or push back down to 122, I will take the rest of the position off (I have been taking half off and adding it back for short-term range opportunities given the past few weeks’ congestion). For EURGBP, the situation is different. Given the economic link between the two economies and the still over-bought nature of this exchange rate; the fundamental bearing is more meaningful to me than short-term technicals and the drift in risk trends. For a short-term setup, I could play the tenative break of the descending trend channel from Jan 13th; but my fundamental outlook for the euro and risk will stay my hand.
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