EUR/USD: Hopes for Greek Aid Deal Still Keeping Euro Afloat

Despite a dimmer outlook for the overall Euro Zone economy, the Euro is foreseen to sustain its recent gains alongside the US dollar today on continued hopes for a Greek aid deal on Monday. Business surveys released yesterday revealed that the region is on course for its weakest quarter since early 2009 as the debt crisis continues to debilitate prospects. Nonetheless, comments by European officials that a definitive deal on Greek is imminent are seen to support the single currency.

In a stark sign that the Euro region’s economic downturn is deepening, business activity in Germany and the broader Euro Zone continued to shrink in November as firms battle with plunging demand. Service sector firms which comprise the bulk of economic activity fared particularly badly this month while laying off workers at a faster pace. The Services PMI fell to 45.7 points, its lowest reading since July 2007. Manufacturing also continued to contract, albeit at a slower pace than in October. Chris Williamson, chief economist at Markit, said that the Euro Zone economy continued to deteriorate at an alarming pace and is entrenched in the steepest downturn since mid-2009. Taking all these into account, he said that the overall economy could shrink by 0.5 percent on a quarterly basis in Q4. The grim forecast is seen to be underscored today by the German Ifo Business Climate for November, which is predicted to reach its weakest level since March 2010.

On a more positive note, consumer spending in Italy, the region’s third largest economy, is seen to have rebounded in September. Italian retail sales are estimated to have climbed by 0.3 percent in September after a flat reading in August and a 0.2 percent fall in July. Meanwhile, Destatis is set to confirm that the German economy expanded by 0.2 percent in the third quarter.

The primary driver for the Euro today is likely continuing hopes of a temporary breakthrough for Greece on Monday as Euro Zone finance ministers gather once again in an emergency meeting to discuss an aid package for the debt-strapped nation. After marathon talks on the Greek aid package collapsed in Brussels last Tuesday, French Finance Minister Pierre Moscovici said that the Euro Zone is a “whisker” away from a deal. Meanwhile, German Chancellor Angela Merkel also managed to appease market jitters as she expressed her confidence that a deal will be attained on Monday. Yesterday, European economic commissioner Olli Rehn likewise expressed confidence, saying that Greece had taken the structural and fiscal reforms necessary, effectively passing the ball to its international partners to deliver their part of the bargain. On elevated expectations that Greece could receive an aid disbursement of up to 44 Billion Euros should an agreement be reached, the common currency is seen to incline today. Hence, a long position is advised for the EURUSD trades.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.