EUR/USD (1.4380) The Greece bailout deal seemed to have bought some time if not exactly solvency. We were surprised to see Fitch, the ratings agency, was the first to downgrade Greek sovereign paper, calling the terms of the new agreement a ‘restricted’ default, and Moody’s followed suit with a downgrade this morning.
Nevertheless, the market’s focus has shifted predominately on the US budget impasse, where lawmakers failed to reach an agreement to raise the debt limit. The dollar will likely continue to weaken although we tend to think a last minute act could spare the government from default. Commentators were quick to mention that a McConnell-Reid solution will likely not meet satisfaction with rating agencies, and therefore would call a credit downgrade into question. But once investors perceived that default was being used as a bargaining tool their confidence certainly already began to erode. We are reminded that a need to increase the debt limit was practically guaranteed by the extension of the Bush tax cuts. As US lawmakers delay, the closer they come to the August 2nd deadline the more psychological stress should accrue in the market. The euro, well supported at 1.4260, could reach 1.4440 or even 1.4580 in the meantime.
Market Bias Index
The euro remains mostly unencumbered by bias, and the US dollar valuation hasn’t weakened in traders’ perceptions – despite all the prevailing uncertainty.
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http://www.easyforexnews.net/wp-content/uploads/2011/07/GDPBD00000188544.pdf
Deutsche Bank
Fixed Income Research – Global