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Overview

Risk aversion guided the US dollar higher through most of last week’s trading, though a late week selloff quickly turned those gains into losses. Fueling the reversal was speculation that the European Union was preparing a weekend “bailout” for Greece; however, considering the EU’s record on the subject, investors may have given the EU more credit than it deserves – the details of the new package remain a matter of speculation.

The noticeable lack of leadership out of the EU in the face of the Greek debt crisis has created an economic environment fraught with uncertainties. Absent a more vocal EU, markets will struggle to find direction in the coming week of trading.

Key reports out of the U.S. should provide investors with some clues as to the health of the (global) economic recovery. Of particular interest is Wednesday’s release of US retail sales numbers for March. The consensus estimate of a 1 percent increase over February – 1.2 percent according to economists polled by Bloomberg – may be tested by tightened consumer credit spending in the U.S., which declined by $11.5 billion in February. That decline greatly exceeded the $0.5 billion drop-off that analysts had been expecting.

Currency Pairs of Interest

EUR/USD

GBP/USD

Analysis and Trade Ideas

Euro (EUR):

The euro will take center stage in the coming week of trading, as the EU continues to tease the market with the occasional detail (or two) of the new aid package for Greece. The latest report indicates that the EU – along with IMF involvement – is prepared to offer a loan package to Greece of at least 30 billion euros ($41billion). The duration of the loans is not to exceed three years and they will carry interest of around 5 percent.

With so many holes in the new aid package, finding cause to buy the euro is exceedingly difficult even at these depressed levels. (The exception being to take advantage of the knee jerk rally that began Friday.) Some of the key deficiencies of the package are as follows: Greece needs more than 30 billion euros; when Greece actually calls for the aid, member states will need to take parliamentary votes for final approval; the rates remain too high to keep Greece from leaving the EU in favor of real assistance from the IMF; and the 3 year loans cut off bondholders who were daring enough to speculate (not invest) in Greek debt, which may underscore a lack of confidence among EU member states in Greece's ability to repay the loans.

While a short-bias toward the euro should be maintained, especially in the longer term, do not attempt to get ahead of the market by shorting too early. A delusional marketplace could push the EUR/USD to the 1.38 handle or higher before reality finally sets in.

Pound Sterling (GBP):

In the face of continued economic uncertainty in the UK, the long-term outlook for the GBP remains decidedly negative. However, the GBP will likely see more strength in the week ahead, as there is no one left to short the currency.

According to the CFTC’s latest Commitments of Traders report, GBP shorts continue to outnumber longs by an overwhelming margin. Meanwhile, technical studies are uniformly pointing to further upside for the GBP, if only temporarily, which may induce a violent short covering rally in the days ahead.

The GBP/USD closed at 1.5375 on Friday and could easily exceed the 1.56 handle in the coming days. However, the short-term outlook returns to negative the moment that the GBP/USD breaches the 1.51 handle, which has proven a stubborn support in recent trading.

Disclosure: Author is Short EUR/USD