Why is Euro heading higher into the Greek storm?

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by Chris Becker

For a union currency that faces the near fact that a member State is going to default – imagine what would happen to the AUD if Tasmania went bankrupt – why is the Euro heading higher?

Here’s the long term view of the Euro against the USD since the GFC, with an obvious downtrend that accelerated last year as the Greek government collapsed.

eurusd_fx31jul07_to_18jan16

The shorter term question is why in recent weeks has the failed currency rebounded as the deadline for the Greek debt resolution (June 30) approaches?

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Its a question asked by Adam Button here (emphasis added)

As a Greek default creeps closer, the euro continues to creep higher. US traders sent the euro 80 pips higher on Monday despite a steady stream of troubling news on Greece.

At some point, there is no fighting the price action. Greek news is undoubtedly bad and late in the day, Varoufakis confirmed Athens won’t be presenting any new concessions in a last-ditch meeting Thursday. That condemns Greece to default unless its creditors pull a total about-face.

In a sign that’s unlikely, various reports have emerged about quickening preparations for a Greek default and potential capital controls. It has looked bleak in the past but in seven years of writing about Greek drama, it’s never been this bad. It would take a small miracle to avoid a Greek default now.

At the same time, the euro just doesn’t care. There is something to be said about unloading an anchor from the Eurozone and that might be how the market takes it. The euro is creeping back toward 1.14 once again it what would be the fifth test of that zone. That kind of price action is hard to deny.

That said, EUR/USD bears have two massive potential catalysts this week in Greece and the Fed. If those don’t reignited the downside, it may be a quick rush to the exits in a move that could send the euro quickly higher.

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Adam is right in mentioning the Fed, indeed the FOMC meeting to be held over the next two days probably has more weight on the direction of the Euro than a Greek default, which seems baked in.

My view is not to be surprised by volatility, either way. A stronger USD on the back of a hawkish Fed combined with an impasse later this week in Athens could see the floor taken out of the Euro and send it to parity sharply. Both a dovish Fed, reluctant to raise rates in the face of a weakening equity market and some recent hazy economic prints may forestall the inevitable collapse of the union currency.