EURUSD Throwing Some Greece on the Political Hinges

After last week’s series of high-impact economic reports, including the ECB meeting and NFP report, traders were looking forward to an opportunity to catch up on their Christmas shopping lists this week. Mr. Market had other ideas though: thus far this week, oil prices have continued their epic collapse, with WTI hitting a 5-year low under 63.00 before bouncing back modestly, Chinese stocks dropped an incredible 5.4% earlier today, and in a classic déjà vu scenario, Greece is facing a political crisis that could prompt the country to default on its debt.

After intense negotiations, the Eurogroup and Greece agreed last night on a two-month extension for Greece to hit its fiscal goals and secure its final tranche of EFSF (“bailout”) funds. Acting fast to try to shore up his power, Greece’s PM Antonis Samaras has moved forward the parliamentary vote for a new president to December 17.

The president is largely a ceremonial position in Greece, but this decision nonetheless amounts to a huge political gamble: if the ruling coalition is unable to get its candidate elected, then new parliamentary elections would be required within four weeks. Based on recent polls, the far-left Syriza party could become the largest party in the new government, and Syriza’s leader, Alexis Tsipras, has already campaigned on a platform of defaulting rather than paying back its bailout loans.

If you didn’t follow that, the upshot is that Greece could be in for some major political uncertainty over the next month, and traders are selling Greek assets aggressively as a result. Greece’s stock market is down over 10% on the day, while its 10-year bond yields are rising toward 8%.

Technical View: EURUSD

Despite the big impact on Greek assets, the political risk has not impacted EURUSD, which is actually trading higher to approach 1.2400 as we go to press. The EURUSD’s resilience can mean one of two things: either traders are underestimating the political risk emanating from the Mediterranean nation, or EURUSD has become so deeply oversold that its due for a bounce regardless of what happens in Greece.

Only time will determine which of these possibilities is correct, but from a technical perspective, the most important dynamic will be the pair’s bearish trend line at 1.2425. This barrier has capped rallies on nine separate occasions over the past four months, so it will serve as a critical barometer of the trend’s health.

Speaking of the trend’s health, there are some signs that it may be vulnerable to a bullish reversal. For one, the pair has carved out a clear falling wedge pattern over the last two months. Though this pattern is created by a series of lower lows and lower highs, the shallower slope of the lows suggests that the bears may be losing momentum. The recent quadruple bullish divergence in EURUSD’s RSI indicator confirms that the bearish momentum is waning.

If, and ONLY if, EURUSD can eclipse its upper trend line at 1.2420 later this week or next week, a more substantial bounce toward the previous highs at 1.2600 could emerge by New Year’s. On the other hand, if the pair reverses off that critical barrier (perhaps as a result of the Greek election), then a continuation down toward at least 1.2200 would be favored.