Currency markets this morning are rocking in the aftermath of the developments in Greece over the weekend and the decision of the Greek government to keep its banks closed for the week ahead. The situation in Greece looks grim and with the country staring into the abyss after months of negotiations the currency markets are responding in the now very real threat that a Eurozone member might have to leave the union for the first time.
The Euro has taken a beating when the Asian markets opened for trading this week and the Single currency dropped 2% to trade at the 1.1000 level overnight. We expect volatility to remain at high levels this morning and it will be interesting to see whether the Euro will regain its confidence as the European markets are coming online. During the previous week we mentioned how weird it looked that while Greece was at a stalemate with its creditors the Euro was reaping gains, possibly meaning that some investors believe that Europe might be stronger without Greece.
It is our opinion that such views are mistaken since the issue with Greece has more political rather economic significance. Even though Greece exiting the Eurozone would mean significant losses for the European banks holding Greek debt the implications on a political level would be far more severe. An exit of a Eurozone member would crack the confidence in the union’s strength on a global level and that wouldn’t look good for the Euro as a currency.
There are still 2 days ahead of us until Greece’s program ends and there are rumours that policymakers are scrambling to make something happen during these 2 days and avoid the catastrophe. We expect the Euro to remain fragile over the next couple of days as everyone’s attention will be focused on the issue, our advice is to limit your exposure to the currency for the time being while markets take their time to normalize.
The calendar today is focused around Euro-related reports with the German inflation levels scheduled for release but we expect the developments in Greece to take center stage. Cable initially dived when markets opened on Sunday but has now recovered and is trading around the 1.5700 area waiting for any fresh developments. We don’t expect any sudden moves from Cable today as traders will most likely remain on a waiting stance.
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