EUR/USD (1.4165) Many analysts spent yesterday picking apart the latest EU summit deal. They bemoaned the lack of detail; highlighted that the effective size of the Greek haircut was less than the 50 percent headline figure; criticised the likely effectiveness of the Italian debt reduction proposal; and were sceptical about the prospect of a weighty Chinese participation.
Given the strongly positive market reaction, these misgivings smack of sour-grapes. Yet, these reservations are not trivial and investors are right to treat any agreement with some caution given the long history of previous agreements, none of which were able to bring the crisis to an end. However, these are not the only lessons to be learned from this week’s events. The first key instruction is that, even amid very difficult negotiations, yet another deal could be thrashed out. The zone is perhaps not ‘ungovernable’ as one critic claimed. The second lesson is that the fate of the EUR/USD was not as dependant on the debt crisis as many believed. Over a year ago when market commentators first recognised the emergence of a peripheral sovereign debt crisis, the euro was in the high $1.30s. The exchange rate was not the instrument that best reflected the deterioration in the interim.
The euro has now satisfied the upside potential we indicated earlier this week. Following the short squeeze, it is prone to a sharp pullback. The best supports are only at 1.4050 and at 1.3975. The broader, however, outlook is for further gains to 1.4290 and then to 1.4395.
Market Bias Index
The perception of USD undervaluation stretched even further yesterday. It is US-currency, not the euro, that reflects most of the pain in the market right now.
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Deutsche Bank
Fixed Income Research – Global