EURUSD gains retreating with Greece weighing on sentiment

The USD is continuing to slowly rebuild some momentum, with the reserve currency trading higher against the majority of its major trading partners to begin the week. It has to be said that the recent round of profit-taking on the USD was pretty aggressive, and there is a valid argument to suggest the currency became oversold.

While I understand that due to economic momentum slowing down, interest rate expectations have been pushed back – optimism remains strong that the Federal Reserve will still begin raising interest rates in 2015. As far as I am concerned, all that the soft economic data has provided the Federal Reserve are reasons to continue remaining hesitant when it comes to raising interest rates. This means that the central bank will feel under less pressure to talk about the timing of rate rises, but the eased pressure does not mean that expectations for the Federal Reserve to raise rates have been altered. I am expecting Janet Yellen to repeat her commitment to raising rates in 2015 later this week and this should prevent further USD weakness.

The EURUSD is pulling back sharply after encountering a complete over-extension over the previous week. There has been an obvious rejection around the 1.1280 level, which has not only prevented the pair from trading any higher, but also led to the resumption of bearish pressure that will likely to lead to the pair returning to 1.10. Upside gains for the EURUSD are still largely limited to USD weakness, with this also being the primary factor behind the rally last week. While economic sentiment around Europe received a boost after inflation data showed Europe exited deflation territory last month, I question this boost in sentiment because inflation remains at an extremely weak annualised 0%. EU inflation is still at a dangerously low level, and inflation is going to remain very weak for quite some time.

I remain bearish on the Euro, and I do think that the primary lift in recent data has been overblown because it remains unclear whether the ECB’s stimulus measures are having the desired impact. The ongoing situation in Greece presents a recurring risk to the currency, and there is a critical deadline looming in just a couple of days. The constant negotiations between all parties over the past couple of months have failed to result in any type of positive result, and I do think that Greece has become a constant weight on investor sentiment this year.

We have already talked about the complete divergence in economic sentiment driving market volatility this year, and there is a risk of this divergence in sentiment spreading within Europe. While some data is improving and economies are benefiting from the weaker Euro, there is a risk that Greece will be left behind the rest of Europe. Recent data has shown that the ongoing situation has dragged on investor sentiment, with Greece’s economic prospects remaining bleak as a result. Retail sales dropping by 1.8% and data today showing that manufacturing activity has fallen to a 22-month low clearly expresses that consumers are reluctant to spend while the government battles to negotiate with its creditors.

Ahmad is chief market analyst at FXTM

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