Forex markets: After approval of Greece’s bailout, the euro gained what was expected of it (in technical terms).

The correction could start immediately, and if it doesn’t it will only be a matter of time ..  

          EUR – The long-awaited and repeatedly postponed agreement on the bailout of Greece has been reached. The euro has benefited, rising from EUR/USD 1.31 to 1.34. This is where our technical targets are placed. In particular, 1.3436 represents the “normal” climb-back level after the recovery which began in mid-January. Up to that threshold, the possibility of a retracement towards/below 1.30 remains in place on a 1m horizon or thereabouts. The upside front, on the other hand, opens at EUR/USD 1.3638-1.3706. Now that the exchange rate has effectively completed – from a purely technical point of view – the current upswing, the question is whether at this point the trend will continue, or give way to a reversal. The (speculative) market remains well short, which does not aid a correction, but is not enough to prevent one. As regards Greece, while the most serious issue has been resolved, there is still much to do, and nothing is easy or taken for granted.

          Other hitches will have to be resolved next week, before Thursday, when the European Council is due to meet. Market sentiment may therefore veer towards caution. The ECB should continue to drive market positivity, but even this won’t be sufficient, in our view, to generate a new wave of optimism, and therefore a new appreciation driver capable of propelling the euro above 1.35. The economic-financial picture may stay difficult in the short term, and this may well prove to be the most difficult phase of the year. Therefore, we express a slight preference for the view which points to an impending correction, albeit brief. The correction may even be preceded by a short range-trading phase. The downside front opens beneath 1.3233-1.3165. However, even in the event of an overshooting of the euro, aided by the prevalent positioning of the market, the correction scenario would probably not be compromised, but only delayed.

          GBP – Sterling has started to show signs of own weakness. This has become evident with the release of the BoE minutes, which showed that at the beginning of the month two Board members, Adam Posen and David Miles, voted in favour of a larger expansion of the APF than was opted for. This was enough to sever the positive correlation between the GBP/USD and the EUR/USD, and result in sterling dropping autonomously both against the dollar and, especially, the euro.

          Now that the Greek crisis has been sidelined to some extent, negative indications from the UK economy should depress the pound against the dollar, bringing the GBP/USD 1.55 mark into easier reach. Data due out next week will include the important February PMI manufacturing index on Thursday, expected to show a slight decline. Our expectations are more pessimistic than consensus. The poorer the data, the stronger the downside reaction of sterling will be, both against the dollar and the euro.

          JPY – The yen has continued to slide, especially against the euro, but has reached a critical level, both against the dollar (USD/JPY 80 area) and the single currency (EUR/JPY 108 area). It is hard to say whether next week will bring a hiatus, with a partial retracement, before the drop resumes, or whether the downswing will continue unperturbed. In any case, barring disappointing economic data in the US, the USD/JPY exchange rate should manage to head for higher levels (at least into the 81 area). In this case, the EUR/JPY may rise even further, as the potential strengthening of the EUR/USD would amplify the rise of the USD/JPY. However, as previously stressed, even in the event of a hiatus in the trend, this would only be a (short) pause.

          SEK – Since the Riksbank’s latest rate cut (16 February), the Swedish krona has weakened slightly against the euro, albeit only marginally. The exchange rate has broadly stabilised above EUR/SEK 8.80. On Wednesday, 29 February, the minutes of the latest monetary policy meeting will be published. Although the central bank has already disclosed its new scenario, the minutes may contain useful elements to better assess whether there is room for a further monetary easing. If so, the Swedish krona would be penalised and may attempt to test EUR/SEK 8.9000.

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