The euro fell sharply against its major counterparts on Wednesday, as concerns over sovereign debt contagion resurfaced, following Moody’s downgrade of Portugal rating.
The single currency was lower against the greenback in the early European trading, with EUR/USD dropping to a 5-day of 1.4330, down 0.65 percent.
“No sooner had the Greek parliament said yes to the Medium-Term Fiscal Strategy (MTFS), than the question was raised; where next? The weaker member states are still battling to attain public debt sustainability and address structural growth issues. Even in the best case scenario, this will take years,” said a note from Societe Generale (SG).
Looking ahead, we see opportunity for a period of calm in the debt crisis, but this will in all likelihood prove short-lived, it said.
Moody’s on Tuesday downgraded Portugal’s credit rating by four notches from Baa1 to Ba2, citing growing risk of second round of aid for the country.
“Greek debt crisis far from over. European Central Bank’s (ECB) acceptance of GGBs as eligible collateral if downgraded to default still the thing to watch. EUR/USD toppy around 1.45 with fair value at 1.42,” said RBS in a note.
The euro was also lower against the British pound, with EUR/GBP sliding to a 6-day low of 0.8956.
“Despite the upcoming solution to avoid a default by Greece (for the short-term at least), the markets are waiting for the details of the second EU/IMF aid plan, and in particular the terms under which private investors will participate,” said SG.
However, investors await the interest rate decision by the ECB on Thursday, while the consensus is increase in refi rate by 0.25 percent to 1.50 percent, the second hike in the year so far.
“An interest rate hike three months after the first hike in April indicates the normalisation process will be gradual despite the historically low level of policy rates. We doubt the ECB will want to accelerate the pace of further interest rate increases from here given the current backdrop (eg. ongoing periphery tensions, signs of growth moderation), which implies a further hike will not be forthcoming until October,” said RBS.
Swiss franc, the best performing currency in the G10 space since the beginning of the year, also gained against the euro, with EUR/CHF shedding 0.4 percent to hit 1.2075.
“Staying long CHF remains a very valid proposition as a global hedge. EURCHF continues to trade as a function of peripheral risks rather than rates differentials, which are likely to widen as the ECB continues to hikes,” said SG.