EUR: Eurogroup claims progress in Greece bail out talks – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the euro has started the week on a softer footing driven in part by rising political uncertainty in Europe.

Key Quotes

“French government bonds came under further selling pressure yesterday although later recovered some lost ground. A potential alliance of the left parties and a daily OpinionWay poll showing an increase in support for Le Pen by one percentage point to 27% which resulted in her lead widening over Independent Macron and Republican Fillon who both garnered 20% of the votes, have both been cited as triggers for the fresh selling. The negative impact on the euro from the increasing political risk premium in Europe has been relatively limited so far. Our short-term valuation model which incorporates a proxy for the political risk premium is currently estimating that EUR/USD should be trading closer to the 1.0500-level based on key fundamental drivers.”

“The euro did not derive much support from yesterday’s Eurogroup meeting after which European finance ministers claimed to have made progress in talks to provide further financing for Greece. Eurogroup President Dijsselbloem described the meeting as a “very positive and good step”. They agreed that EU and IMF teams would soon return to Greece to hammer out details of an agreement including pension cuts and lowering the threshold at which people start paying income tax.”

“According to reports, the Greek government has agreed in principle to the additional reforms where there had previously been a red line. However, there is still caution that remaining differences can be overcome during the forthcoming mission to Greece. European officials do not appear overly in hurry to reach an agreement with Greece having until July until it could run out of cash. The developments support our expectation that another compromise agreement will eventually be reached to extend financing to Greece, although the close proximity to upcoming elections increases the risk of complications. We continue to see risks to the euro from the ongoing Greek bail out stand off as asymmetric. If a compromise deal is reached it will offer only limited support for the euro, while the failure to reach an agreement would weigh more heavily on the euro.”