EUR USD (1.2700) Sunday initially saw the euro dropping below $1.26 when exit polls in Greece showed anti-bailout Left radicals running neck-to-neck with pro-bailout parties. Later as soon as the tiny majority for New Democracy became obvious the euro jumped beyond $1.27. This shows the market has taken note, with a giant dose of relief, about the lessened probability of a worst-case scenario for the eurozone. The backdrop for the latest coalition negotiations in Greece appears to be one of a greater willingness of world leaders to review the tough austerity conditions. Perhaps the parliamentary win by French President Hollande’s socialist party is what has cemented this stance. In any case, the pressure to come up with new policy responses to the crisis is mounting. The latest concept, apparently being discussed by the top EU officials, is the issue of euro-bills. An interest rate cut at the ECB is far from off the table, and Draghi has hinted that more liquidity may be available to solvent banks with sound collateral, Even the Fed has declared itself ready to ease in case of eurozone deterioration. So the markets are cautiously optimistic.
The euro’s recovery has opened the potential to climb up to 1.2790 and possibly even to 1.2840. However, we believe the upward correction will struggle from here and only beyond the latter will we concede the potential for sizeable gains. The first support to watch (not strong, but indicative) is at 1.2560. Market Bias Index TMPractically all the major currencies have moved back to perceived fair-value. Only the JPY and the AUD maintain a modest perception of overvaluation.
Click here to read the full report: Daily Forex 06.18.12
Deutsche Bank