The Euro’s recent consolidation belies greater uncertainty about the outcome of the ongoing negotiations between Greece and its creditors. That fear seems evident in growing peripheral bond yield spreads and soft Eurozone stocks.
We suspect that, after EURUSD has dropped around 6bf from its lofty highs at around 1.15, the market view is that some negatives associated with Greece should be priced in. This is partly true.
That said, we believe that the markets maybe too complacent expecting an 'easy' deal between Athens and its creditors. Indeed, we doubt that Syriza will commit to a political suicide and back away from its 'red lines'. In addition, absent market panic, creditors (especially the IMF) are unlikely to change their stance on Greece.
For FX markets this means that risks for EUR are still on the downside in the run up to next week's IMF repayment. While we cannot exclude a last ditch effort to boost Athens' cash position and avoid a default in June, further payments loom large in July and August and there seems to be not much appetite for a more comprehensive deal as of now.
Needless to say, uncertainty about Greek debt sustainability will likely linger given the country's weak economic fundamentals and fiscal position.
Elsewhere, investors’ focus will turn to next week’s ECB policy meeting, which is unlikely to surprise on the less dovish side.
As such we remain of the view that EUR rallies should be sold.
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