Euro supported by hopes over Greece

The euro held its ground against the dollar at the start of the week, clinging to hopes that Greece will finally strike a deal with the troika and secure its second round of bailout funds worth €130 billion.

Despite a decision on whether to accept more painful austerity measures to meet demands set by the ECB/EU/IMF (troika) was postponed on Monday to the following day, the single currency recovered to hold above a key short term technical level against the dollar, as forex investors remained optimistic that a deal, in the end, will be reached.

Greece is also still engaged in separate talks regarding Private Sector Involvement (PSI). The deal with private bond holders has been postponed several times over the past few weeks, but hopes that a debt swap deal will eventually be reached has kept euro bears in check and provided support for the single currency.

Failing to secure the €130 billion aid package would result in a chaotic default for Greece, and would most likely destabilise the whole of the eurozone. European leaders stepped up the pressure on Greek politicians on Monday. German Chancellor Angela Merkel said “time was running out” and added that she “could not understand why we need a few more days”, in response to Greece’s decision to delay its decision over the troika’s conditions, by another day to Tuesday.

French President Nicolas Sarkozy said that “an agreement has never been so close”, but it had to be “concluded”. Sarkozy reiterated that bankruptcy “isn’t an option” but insisted that there could be no more aid without reform.

The single currency has held steady versus the dollar so far this week as hopes for a deal provided support. EUR/USD was down a quarter per cent on the week by the time of writing. The pair found support on the short-term at the 50-day moving average. It has closed above this level since breaking higher on January 26, despite falling to a low of 1.3028 on Monday, but managed to recover and close higher than the previous close.

A positive outcome from Greece could spark another rally, however risks to the downside are still very persistent, especially if the market has already priced in a deal by Greece. The euro needed to break above January’s high, at 1.3221, and trade higher than the 38.2 per cent Fibonacci retracement, at 1.3244, of the move from October 2011 high to January 2012 low, to establish a fresh bullish structure and pave the way for more gains.

Fundamentals still favour the dollar however, and the latest positioning data show short euro positions remain high. Risks for the single currency are posed by a potential interest rate cut by the European Central Bank in today’s meeting or in the near-term, and by a negative outcome from Greece or any worsening in the eurozone periphery.

A drop below the 50-day moving average and below support represented by February 2012 low at 1.2026 would clear the way for further downside pressure to test the January 25 low at 1.2931 or even lower to test this year’s low at 1.2624.

The Reserve Bank of Australia surprised markets on Tuesday, leaving interest rates unchanged at 4.25 per cent, which signalled optimism that economic growth may strengthen. The RBA board said policy was appropriate “for the moment” leaving the door open for a rate cut in the future. The statement from the bank still evidenced a dovish bias as they said they will “adjust the cash rate as necessary to foster sustainable growth and low inflation”.

The Aussie climbed across the board following the RBA’s decision to leave the cash rate unchanged, which came as a big surprise versus consensus which was unanimously for a 25 basis point cut in rates. AUD/USD jumped almost 50 pips higher at the announcement, and surged to a session high at 1.0822.

The pair continued trading along a rising channel from early January and is now poised to test the top of the channel, around 1.0890, before eventually testing its all-time high of 1.1080.

The Aussie was also higher against the euro despite the latter holding strong against most of its major rivals. EUR/AUD declined to a fresh record low at 1.2133 dropping considerably as the RBA decision hit the wires.

The yen in the meantime continued scaling some of its recent gains versus the dollar and fell against the euro at the start of the week, as forex traders braced for another intervention by Japanese authorities and cut their positions on the Japanese currency.

USD/JPY bounced higher to 76.86 on Tuesday, after hitting 76.02 on the February 1, as it edged dangerously closer to its post-war low and more importantly to levels in which the Bank of Japan is expected to intervene to curb the yen’s rise. Japanese Finance Minister Jen Azumi said on Monday that he won’t rule out any options to counter speculative moves. EUR/JPY was also higher, more than a quarter percent by the time of writing.

Upcoming FX key events:
Today: BoE Interest Rate Decision and Asset Purchase Target, ECB Interest Rate Decision.
Tomorrow: German HICP & CPI, Swiss CPI and US University of Michigan Consumer Sentiment.

Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3350.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bullish, target 0.9776, key reversal point 0.90.
AUD/USD is bullish, target 1.1090, key reversal point 1.0670.
NZD/USD is neutral.

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Mr Xuereb is a trader at RTFX Ltd.