EUR USD Rises as European Officials Reach Agreement

The EUR USD is rising this morning after European officials announced a compromise with banks to take a 50% writedown on Greek government bonds. Apparently this was the final piece of the puzzle that allowed the summit to end after day long negotiations. Throughout the session, European leaders fought for as much as 60% of a writedown while the banks countered with 40%. It has been speculated that the banks apparently agreed on 50% after threatened with a “take it or leave it” ultimatum.

Besides the 50 % writedown for private bondholders on their Greek debt, additional progress was made regarding bank capitalization and the size of the Euro Zone’s bailout fund. On the surface, the agreement appears to be big enough to alleviate some of the fears in the market over the short-run. It certainly addresses the capitalization problem and it gives the European Financial Stability Facility (EFSF) more fire power to prevent contagion.

As it currently stands, it should be enough to take out some of the uncertainty in the markets, but it’s too early to tell its long-term impact because the system to implement some of the proposals is still a long ways off. The general consensus among experts is that the plan was not as “bold” as many had expected it would be and that it lacks the details of a truly “comprehensive plan”. Nonetheless, traders liked what they saw because it did offer them clarity which will allow them to trade with some conviction at least in the short-run.

The key feature of the plan and the major sticking point during most of the negotiations was getting the Greek private bondholders to agree to a 50% “haircut” on a voluntary basis. The easiest part appears to be the reaching of an agreement to boost the size of the bailout fund from about $600 billion to almost $1.4 trillion. With these two features out of the way, the only question remains is how all of this is going to get paid for and implemented.

Technically the EUR USD is testing the 61.8% retracement level of the August to October decline. This price is 1.4013. A sustained move through this level is likely to trigger a further rally to a downtrending Gann angle at 1.4119. Major support is at 1.3825. Since the Euro has rallied considerably after bottoming on October 4 at 1.3145, traders have to be leery of a possible closing price reversal top. This is unlikely to occur today, but nonetheless, there exists the strong possibility of a bull trap at current price levels. Overall this plan didn’t contain any blockbuster surprises, but it is hard to determine at this time how much has been already priced into the market. It is suggested to traders looking for a place to short the market to wait for the rally to stop and reverse rather than trying to pick a top.