Euro Falls as Uncertainty remains over Greek Bailout Package

The Euro was under pressure throughout the New York session as uncertainty over the Greek bailout package encouraged more selling.

The Euro was under pressure throughout the New York session as uncertainty over the Greek bailout package encouraged more selling. Downside momentum dried up as the market approached last week’s low at 1.3443. This triggered a late session short-covering rally which helped erase close to half of its losses.

Optimism over a possible deal between the European Union and Greece waned as traders grew impatient over the lack of progress toward a resolution regarding the Greek debt crisis. A week-end report from the Wall Street Journal citing the possibility that Germany and France would bail-out Greece to the tune of $41 billion failed to generate any strong buying or short-covering early in the session. This triggered a relentless barrage of sell order shortly before the New York opening. Downside pressure was on the Euro until about the mid-session when it became apparent that the recent bottom at 1.3443 was going to hold.

Monday’s action indicates that investors are getting frustrated with waiting for the deal to be set and with Greece’s inability to make additional budget cuts. The only thing that could turn this market around at this time will be either a concrete resolution to the crisis or a short-covering rally triggered by fresh foreign buying of the Euro.

The USD CAD fell sharply lower after a report showed that Canadian GDP grew in the fourth quarter faster than economists forecast. Traders erased an earlier gain after the GDP report showed the economy expanded by 5% versus pre-report guesses of 4.2%.

This morning’s better-than-expected GDP report indicates the economy has enough positive momentum to perhaps trigger a more hawkish statement from the Bank of Canada at Tuesday’s policy meeting. This robust report could serve as notice that the economy is expanding at a pace that would warrant an interest rate hike by the BoC sooner than the Federal Reserve.

The GBP USD plunged following reports that a poll indicated that the minority party may win the upcoming election. Such a move will mark the first time since 1974 that the minority party has gained such power. Investors feel that this drastic change will stall the country’s efforts to shore up the U.K.’s debt issues. In addition, the weaker Euro also dragged down the Pound as fear swept through the markets over the possibility that the sovereign debt crisis was spreading to the U.K.

Heightened political pressures along with the poor economy and the Bank of England’s continued easing of monetary policy weighed heavily on the Pound since early in the session when stops were hit below 1.50. Shortly after the New York opening, the GBP USD has found support at a .618 retracement level at 1.4854. The successful test of this level generated some light short-covering, but far from enough to trigger a change in trend.

Demand for higher risk assets because of today’s strong U.S. equity markets helped to support the USD JPY. Although the range was tight, the chart formation suggests that the Dollar is poised to breakout to the upside if a rally can trigger stops above 89.50. The return of risk aversion should pressure the USD JPY which could lead to an acceleration to the downside through the recent main bottom at 88.55.

The weaker Euro helped to support the USD CHF. Although the trend turned down on the daily chart last week, Monday’s lack of follow-through to the downside indicated that short-sellers may have jumped the gun in anticipation of an EU/Greece deal. Sellers once again pressured the Swiss Franc in anticipation of a lower Euro and another round of Swiss National Bank intervention.

Demand for higher yielding assets helped to support the AUD USD and NZD USD. Volatility was high in these two markets on Monday following mixed reports overnight.

On Sunday night it was reported that the Australian manufacturing sector expanded at the fastest pace in two years, but that the current account deficit widened in the fourth quarter. In addition, news that the Chinese Manufacturing Index fell pressured both the Aussie and Kiwi. Better than expected U.S. economic reports triggered a rally in the equity markets which led to increased demand for higher risk assets. Traders also factored in the possibility of an interest rate hike by the Reserve Bank of Australia at Tuesday’s policy meeting.

Technically the Aussie closed in a position to change the main trend up on a move through .9070. The size and duration of the rally will be determined by whether or not the RBA raises its benchmark interest rate by 0.25 basis points.

An attempt was made in the NZD USD to drive it lower, but the strength in the U.S. equity markets helped turn this market around at the mid-session. The close near the high has this market in a position to challenge the recent tops at .7057 and .7078. A rally through both of these prices will turn the main trend to up.