High volatility
The EUR/USD pair has witnessed extremely high volatility since the beginning of the current month. The pair fell for five straight sessions in the first week of April, before rising for four straight sessions last week. The latest rebound witnessed in the last week stalled at 1.0847, as the US dollar began a comeback on an uptick in the core inflation figures.
The pair fell to a low of 1.0658 earlier today, before recovering marginally to trade at 1.0688 levels. Going ahead, I believe the area around 1.0850 is likely to act as an interim top in the pair. The EUR should continue to weaken right till the first week of May, especially if the April 24 Greece talks fail. The pair could extend the losses to 1.05 levels, while the doors could be opened for further losses in case the Greece situation worsens.
Record low bond yields, Long-end yields in negative
The German bond market curve shows negative yields on bond maturing up to 8 years. The 9-year yield also dipped into the red on Friday, and currently trades dangerously close to zero levels. On similar lines, the 10-year yield is down to 0.08%, and did hit a record low of 0.049% on Friday.
The weakness in the long-end yields makes EUR less attractive as a growth currency, however, so long as the Greece issue persists, it is highly unlikely that the currency would act like a safe haven asset. Moreover, the Japanese benchmark yields are now higher than those in Germany. Thus, even the prospects of EUR/USD finding support from the rise in EUR/JPY (in case of risk-on event) are lower.
Given the worsening German-US yield spread, the EUR/USD is likely to remain under pressure. Greek issue would only worsen the yield spread.
PMI Data could be ignored
The preliminary manufacturing and services PMI readings across the Eurozone could point to an improvement in the economic activity. However, the ongoing Greek issue and the falling bond yields in the core Eurozone are likely to overshadow the positive data.
Meanwhile, a weaker-than-expected data could further weigh over the benchmark bond yields in the Eurozone and lead to weakness in the EUR.
Eyes 1.05 levels, Bond markets preparing for the worst
Consequently, the pair could very week drop to 1.05 levels ahead of the Eurogroup meeting on Friday, wherein the Greece issue is likely to take a center stage. The country needs financing in order to meet its obligations to the IMF. If the reforms list is rejected on Friday, Greece would not get financing and may eventually default on its payments. At the moment, the markets are potentially preparing for the worst, which is evident from the rising 10-year bond yields in Greece, Spain, Portugal and falling yields in Germany.
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