The EUR/USD posted a solid gain for the week. The lack of follow-through to the upside by the U.S. Dollar helped fuel the rebound rally by the Euro . The relative calm in the markets now that it looks like the Greece crisis is over also attributed to the strength. From a technical perspective, the Forex pair reversed up on the weekly chart, suggesting the possibility of a 2 to 3 week counter-trend rally.
Most of the price action last week was dominated by technical factors since the news was pretty thin. Although sellers took the market through the previous bottom at 1.0818, traders failed to drive the market through this level with conviction, leading to a short-covering rally into the close on Friday. The current chart pattern suggests the strong possibility of a rally back to at least 1.1122.
There may have been a reversal last week on the charts, but the fundamentals remain . The key fundamental to pay attention to is the divergence between the monetary policies of the U.S. and the European . Simply stated, the Fed is on a path to tighten with its eyes set on its first interest rate hike in nearly 10 years. The ECB on the other hand is only four months into its fresh quantitative easing program. And traders are still giving the the benefit of the doubt as to whether this is working. With the pressure from Greece alleviated, traders are likely to pay closer attention to the Euro Zone’s economy.
Last week started off with Greece paying back 4.2 billion Euros in principal and interest to the ECB and 2.05 billion Euros in arrears it has owed to the IMF since it stopped repaying its debts at the end of June. The source of the funds for the repayments was the 7.16 billion Euro bridge loan the country secured the previous week when it agreed to a series of harsh reforms. The measures, which have to be put into law, should result in the country receiving its third bailout.
Although the repayments helped ease tensions in the market, the upside is likely to be limited by concerns over whether Greece will receive any debt relief. It seems the IMF has taken the stance that Greece needs debt relief, but that somebody else has to provide it. One idea that is likely to be discussed this week is extending the maturities of Greek loans. IMF Managing Director Christine Lagarde said last week that a third bailout plan for Greece would “categorically” not succeed without debt restructuring. Germany, on the other hand, is against the idea of debt relief. It feels that debt forgiveness could set a precedent for other indebted members of the Euro Zone.
This week’s economic data will be dominated by the U.S. On tap are reports covering Durable Goods on Monday, July 27 and Advance GDP on Thursday, July 30. Sandwiched in between both reports is the Fed FOMC Statement on Wednesday, July 29. Traders expect the to reiterate its stance that interest rates are likely to rise before the end of the year.