Greek Woes to Keep Euro Under Pressure

 |  About: iPath EUR/USD Exchange Rate ETN (ERO)
by: Mitul Kotecha

The euro continues to struggle both due to the direct and indirect impact of Greece’s fiscal problems. The indirect impact was felt when the euro dropped sharply following the release of the below consensus German ZEW survey (a financial market participants survey), which dropped to 47.2 in January compared to consensus expectations of 50.0 and a reading of 50.4 in December. Investor sentiment as measured by the ZEW was dented by growing concerns about Greece outweighing any positive bias.

In terms of the direct impact on the EUR, concerns about the seriousness and / or ability of Greece to solve its problems are also weighing on the currency. The Ecofin meeting of European finance ministers this week inspired little confidence about the fate of the country. Officials noted that Greece would not receive help from its neighbours but said its problems are a concern for all of the eurozone. Officials urged Greece to take the necessary steps to reduce its burgeoning budget. In particular, officials called on Greece to detail "concrete" measures to achieve planned reforms.

The strength of the EUR was also discussed at the Ecofin meeting, with the EU's Juncker stating that it should better represent European interests. The EUR is clearly overvalued and will act as yet another constraint to eurozone recovery so such concerns should be taken at face value but there is little that will likely be done about it. Intervention is certainly not much of a prospect at current levels. Greece's problems may give some comfort on this front as it will likely keep the EUR under pressure but this benefit is small compared to the bigger cost that problems in Greece could have on the eurozone.

EUR / USD looks especially vulnerable below its 200-day moving average around 1.4298, the first time it has traded below the 200 day moving average since May 2009. Concerns about Greece will not go away quickly and will likely put further pressure on EUR / USD. EUR / USD 1.4250 will be an important level to watch and if a drop below this level is sustained on a closing basis a quick move towards 1.40 will beckon.

Going forward, downside risks to the EUR may be limited by the general improvement in risk appetite as markets appear to be shaking off earnings disappointments, which in turn could put the USD under renewed pressure but for now the EUR will find it difficult to shake off the negativity surrounding the problems in Greece.

Disclosure: None