The euro remains a prime ‘sell on rallies’ candidate, with headlines continuing to throw EUR/USD about.
Overnight, it was positive to see Germany vote through the expanded powers of the EFSF through its lower house with ease; it was also largely expected however, so the bounce in the price was sold. The main reason why traders continue to look to sell the pair above 1.36 is that Europe is no closer to a final resolution. It is clear that the EFSF will be voted through all 17 parliaments, however as the former IMF chief economist put it last night, the size of 440 billion euro is inadequate and will need to be increased if it is to ring-fence the rest of Europe from a Greek default. Until we get some clarification on what Europe plans to do with the EFSF, we will no doubt see traders selling any rallies in the pair. Greek Finance Minister Venizelos confirmed that the troika have returned to Greece, and that the first meeting was positive and creative.
It looks like we will see Greece get its sixth tranche of aid, which will avert a near-term default, but then we will only have to wait another six weeks until it has to receive the seventh tranche. This invariably will mean having to convince the Troika (EU, ECB and IMF inspectors) that the country is meeting its budget targets. We also need to see a 90% participation rate in the voluntary exchange offer. Given what we have been seeing, we expect to see traders continue to sell EUR/USD if it trades 1.3690.