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It’s Crunch Time for the Euro

As the month of May winds up to a close, the months ahead, especially June and July could prove to be quite some decisive months as far as the single currency, the Euro is concerned. With the US Dollar poised to make a comeback after what looks like a reasonable correction to the trend, the strength of the Greenback, combined with the Greece crisis showing no signs of abating and with huge dues to be repaid to the IMF in the coming months, the Euro could well see some volatility in the summer months ahead.

To begin with, Greece has still not yet reached any agreement with its lenders as the cash strapped continues to negotiate with the Eurogroup while sticking to its hard line stance of offering no room for compromise.

Indeed, the markets saw a glimpse of the seriousness of this issue when Greece had to dip into its IMF reserves to pay off its previous tranche of debt to the IMF. The month of June certainly offers to breathing space as Greece has to pay close to 300 million Euros to the IMF on June 5th. The country also has to find enough funds to pay the public sector salaries and pensions.

Greece negotiators, including the Finance Minister, Yanis Varoufakis had over the week remained optimistic of a deal but it comments were watered down by the tough German officials who are unwilling to budge unless Greece blinks first.

Greece and the Eurozone - A Catch 22 situation

So what happens should Greece accidentally default on its loans?

Grexit: For starters, Grexit has been one of the main talked about events. While the Eurozone is relatively contained from any risks should Greece default and be pushed out of the Euro, the fact remains that investors will no doubt lose confidence in the single currency. With the recent regional elections in countries such as Spain which saw the rise of the anti-establishment parties, a Grexit is all that is required to give a strong platform to such parties. Also, should any other Eurozone country see a similar crisis, getting international funding would be quite difficult as a repeat of a Grexit could play into the equation sending bond yields higher despite the ECB's QE purchases.

Creditors blink first: On the other hand, should the Eurogroup give in to Greece demands, it would be seen as a massive victory for the Syriza party, which came to power promising a better deal for the Greeks. This victory should it happen, could inadvertently set precedence for other Eurozone countries like Spain for example, which translates to a fact that more favorable terms could be negotiated with the lenders.

As we can see, in both the scenarios, the single currency will definitely be in focus and could weaken investor confidence.

With the Buck, now steady and poised to regain its position as the best performing currency, the Euro could eventually see a strong decline, perhaps even down towards reaching parity against the US Dollar.

Giving the devil its due, the Eurozone has been known to deal with crises in the past at the 11th hour and it wouldn’t be surprising to see a similar deal being struck either in June or in July and perhaps one that could be deemed fair to all parties involved. This is perhaps the biggest factor to take into consideration and could in fact be the ‘third option.’

EURUSD – Technical Analysis

The Euro managed to bounce off the 1.068 support level but the current monthly candlestick definitely spells a bearish outcome in the near term that is likely to threaten the 1.068 support level. A monthly or weekly break of this support could easily open the floodgates towards parity for the Euro.

As far as the US Dollar is concerned, this week’s Q1 revised GDP estimates will be the main risk and it would be hard to pinpoint how the markets will react to the news. Looking forward, the May jobs report will be released early next week and consensus already points to strong gains in the non-farm payrolls as well as a tick lower in the unemployment rate.

All said and done, watch out for the months of June/July as far as the Euro is concerned.

Friday, 29 May, 2015 / 12:49

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