EUR USD (1.4125) An upbeat German IFO was the one piece of good news that emerged from the eurozone on Friday; at least growth in the zone’s largest economy still seemed on track. Thereafter, however, the market focus returned to the Greek debt crisis and the prospects for the passage of a new austerity plan. One Greek MP was reported as saying that he may vote against it. This set the scene for the rest of the day, as traders became reluctant to hold euros over the weekend. However, the scene was already partially set by television images over the course of last week. The demonstrations outside the Greek parliament building invariably provided a backdrop for any thoughts about the outcome of the lawmakers’ debate. This is a very salient cue that may lead one to overestimate the extent of opposition within the country. Voters who are in favour of avoiding bankruptcy at all costs – even that of greater austerity – do not join the demonstration and are therefore not salient. For example, a survey by the Greek newspaper Ethnos revealed that only a fifth of those polled were willing to reject the austerity plan at the risk of bankruptcy. Just as many would accept the plan unconditionally, and most of the remainder would also accept it once all efforts to soften it had been exhausted.
Much of Friday’s trading volume was concentrated just below 1.4260. So, while the euro remains below this level, the downward pressure should remain and risk will be for a drift down to 1.4010. As before, however, a durable stabilisation requires a break above 1.4455.
Market Bias Index
The euro is gradually slipping to a point where it is generally perceived as undervalued. For the moment, however, it still seen as on a par with the GBP, the CAD and the AUD.
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Deutsche Bank
Fixed Income Research – Global