The EUR/USD finished sharply lower last week and is now in a positon to challenge the late May bottom at 1.0818. Last week, Greece’s Parliament approved the new bailout terms of its creditors and Germany’s Parliament voted in favor of authorizing its finance ministry to negotiate a third bailout with Greece. Also helping to pressure the Euro was the announcement that the ECB would increase emergency liquidity to Greek banks, which will reopen on Monday after being close for three weeks.
The main catalyst behind the selling pressure was the divergence between the Fed and European Central Bank policies. Last week, in her testimony before members of Congress, Fed Chair Janet Yellen signaled that the central bank is on course for a rate hike. The price action this week indicated that investors are looking at September for the first rate hike in nearly ten years. Yellen also downplayed the impact of the Greek crisis and China’s stock market crash on the Fed’s decision.
The European Central Bank’s monetary policy committee decided to leave interest rates unchanged as well as current stimulus levels. With the Fed on a path toward raising interest rates and the ECB just four months into its quantitative easing program, the interest rate differential clearly favors the U.S. Dollar, making it a more attractive investment.
The fundamentals remain weak at the start of the week because of the instability in the Euro Zone economy generated by the Greek crisis and on investor concerns about the divergence between the Fed and ECB policies.
I can’t see anything in next week’s fundamental reports that could lead to a shift in sentiment, however, technical factors could come into play because the market is testing a retracement zone formed by the 1.0462 to 1.1466 range.
Early in the week, traders may be focused on Greek banks because they will open for the first time in three weeks with help from the ECB. At mid-week, U.S. existing home sales may underpin the U.S. Dollar. Euro Zone PMI data will be watched, but the main focus remains on Greece. It will remain the main focus for several weeks until investors can see the impact of the new austerity measures on its economy.