Slim Chances of Greek Aid May Hit the Euro

For over a month, EUR/USD has been consolidating,  between 1.3450 to 1.3800, on continuous uncertainty over Greece and aid support from the European Union. This week’s EU summit, Thursday and Friday, is likely to provide the catalyst to shape a new trend.

At these levels, investors remain cautious as uncertainty prevails. Some recent commentary, events, and news continue to cloud the outlook:

• Despite Europe’s mess, the RBI rate hike, and mixed economic data,  U.S. stock markets have been rather resilient aiding support to risky assets, often in the U.S. session. (positive for Euro)

• Investors are now expecting a little more than just an act of solidarity to Greece at this week’s summit, but shy off a decisive measure.  (negative for Euro)

• Despite strong remarks, by ECB’s President Jean Claude Trichet and French President Nicolas Sarkozy, opposing IMF help ; IMF contribution is the most likely scenario at this time. (negative for Euro)

• IMF help suggests that the EuroZone cannot take care of its own problems. Thus, questioning the viability of the Euro. (negative for Euro)

• According to iMarketNews.com, “help by Germany could be granted only after Greece had exhausted its capacity to raise money on the international capital markets, the IMF had agreed to make a “substantial contribution” to a rescue package, and the EU members had agreed to negotiate new rules to prevent a re-occurrence of such a debt crisis, the Financial Times wrote.” (negative for Euro)

• ECB’s Constancio suggests a loan to Greece at a normal interest rate does not mean a bailout. IMF help would hurt the Euro. (positive for Euro)

• Fitch ratings says it doubts EU leaders will offer Greece aid at the summit this week, but failure to reach a deal does not trigger a downgrade as long as the option of going to the IMF remains open – reuters (neutral for Euro)

• Greece will not be on the official agenda of the EU summit, an EU diplomat revealed – IGM (negative for Euro)

It appears the Euro is holding up above $1.3450 only by the support of strong equity markets in the U.S., which leads to traders trimming USD long positions, and some investors who speculate a standalone EU solution is still a prospect. From the recent back and forth talk between government officials and the lack of unity to help Greece, a clear decisive measure is a long shot. The Euro should remain under pressure until a clear solution is achieved.