The Too Little Too Late Scenario

In the eurozone, it will be interesting to see the political dynamics inside and outside Greece in the wake of this week’s elections. Will Greece be able to form a ‘stable’ and credible government?

 If so, how will the communication developed between Greece and the sponsors of the bailout package? It will not be easy to find a ‘middle of the road position’ that is politically and financially acceptable for both sides. Especially the Germans. Angela Merkel is not going to sit quietly.

Indications that both parties might fail to reach a new equilibrium might add to market nervousness. Outside Greece, the focus in Europe will remain on Spain. Even after the Spanish banking plan, the country remains under heavy pressure. The tensions on Spain have probably even more potential to hurt the euro than is the case for a failure to reach an agreement with Greece. The positivists among us might consider the option that the EU Summit next week will come with fresh ideas to address the crisis. However, who dares to hope that this summit will surmount the ‘ too little, too late’ approach that was the key characteristic of the management of this crisis until now. So, at least the from the EMU side of the EUR/USD story, we don’t see much reason to turn positive on the single currency, even not after the outcome of the Greek elections. 

Of course, the developments in Europe are only half of the potential input for EUR/USD trading. In the US, the Fed will take centre stage on Wednesday as it will announce the outcome of its two-day policy meeting. We see a quite a high chance that the Fed will take additional, even quite aggressive steps to support the economy. More operation twist is possible, but even additional outright asset purchases can’t be excluded. In theory, these measures should be a negative for the dollar. However, why should it lead to a sustained rebound of the euro? And the famous Bernanke Gold Bounce..

The Obama Administration will be pushing the Feds for aggressive action, the Democrats need to be able to show the road to recovery, if Obama and comrades want to remain in power come November. Talk about too little too late, the Feds need to do something NOW to give Obama any hope come elections in November.

 More monetary easing in the US might be (moderately) supportive for sentiment on risk, but it won’t solve the structural issues in Europe. So, we maintain the working hypothesis that any positive impact from more QE in the US on EUR/USD to be limited and probably short-lived. Maybe, markets might even see the action from the Fed as in indication that the likes of the US and the UK have still policy tools available to fight the crisis while the institutional context in Europe is a permanent obstacle to address the crisis. So, some consolidation in EUR/USD is possible short-term, but we maintain our euro negative bias as long as there is no perspective that the structural/ institutional loopholes in the EMU will be fixed.