Greek Debt Crisis Decimates EUR/USD

09/20/2011 6:00 am EST

Focus: FOREX

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

With speculation swirling about an imminent Greek default, the EUR/USD currency pair is under extreme downward pressure which is likely to continue until the controversial bailout issue is somehow resolved.

The euro remained under pressure at the start of this week’s trading after this weekend’s G7 meeting in Poland failed to produce any agreement on the Greek rescue deal, renewing fears that Greece was headed for a default on its sovereign debt.

Markets remain nervous as the troika, comprised of the International Monetary Fund (IMF), European Central Bank (ECB), and European Union (EU) leaders, continue to withhold the disbursement of the second tranche of bailout funds to Greece seeking further deficit-reduction moves from the country.

Greek Prime Minister George Papandreou cancelled a planned visit to the United States to hold an emergency cabinet meeting yesterday to address the concerns of the European officials.

Greek Finance Minister Evangelos Venizolos will outline a range of austerity measures intended to assure the creditors that the country is on the way towards fiscal consolidation with some reports suggesting that the troika is demanding further reduction in government payrolls to bring the total cuts to 100,000 jobs.

Such a move is likely to create further political turmoil for Mr. Papandreou’s government, with opposition forces already arguing that the current policy is sending the Greek economy into a tailspin.

After rebounding to 1.3700 at the start of European trading, the EUR/USD currency pair lost momentum and hit fresh session lows at 1.3630 as traders fear that Greece is running out of time. Some analysts have speculated that the country may default as early as September 20, when two big bonds totaling EUR 769 million have coupon payments due.

We doubt that authorities would risk such a disorderly outcome and will most likely continue negotiations throughout the week.

Here is a daily chart of EUR/USD (find more FX Bollinger Band charts here):

chart
Click to Enlarge

Nevertheless, the pressure on the EUR/USD is likely to remain until the Greek bailout issue is resolved. If the parties involved reach some sort of compromise, the EUR/USD could stage a sharp short-covering rally, but failure to make any progress will likely cause a further selloff in the pair and shorts could target the psychologically important 1.3500 level as concerns mount that Greek default is imminent.

By Boris Schlossberg of BK Forex Advisors

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