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It has been a quiet London session as a public holiday in the US keeps volumes low. This has kept major risk assets stuck in tight ranges. EURUSD is trading between 1.2695 – 1.2740. It’s a big week for the Eurozone, and it kicks off today with a finance minister’s meeting that starts in Brussels at 1600 GMT. We expect to hear from them some time later this evening once the meeting has concluded. We already know that Greece won’t get its next tranche of bailout funds in time for an EU 4 billion bond redemption payment that is due on Friday. However, there will be no default, as the EU authorities will deal with the payment. Thus, although Greece’s parliament signed off on the 2013 Budget and another round of austerity measures, it still won’t get the money.

The Finnish finance minister has said that the Eurogroup is still waiting for more information on Greece but he said that the Eurogroup may meet later this week to discuss the situation, thus raising expectations that Greece’s next EU 30 billion of bailout funds will be released in the short term. However, the bailout funds still need to be passed by some individual parliaments including the Bundestag in Germany. Thus, Greece’s financing needs could be controlled straight from Brussels while the rest of Europe decides whether or not to give Greece more money. This is obviously not worrying investors as European stock markets have managed to put in a respectable performance today even with the uncertainty of the Troika report looming in the shadows.

Greece: a giant money pit

But it is no wonder that the Eurogroup is being cautious when it comes to Athens. The latest draft of the Troika report shows that Greece may need an extra EU15bn in aid between now and 2014, and an extra EU 17.6BN for 2015-16. These bailouts are becoming a bit like bottom less pits for the creditor nations of the currency bloc. After two and half years’ Greece remains a problem and it is hard to see the Eurozone remaining patient with Greece when its problems seem never-ending.

EURUSD: medium-term bearish outlook

Interestingly, the news of Greece and its potential extra funding needs did not weigh on EURUSD, which along with other assets are experiencing a mini-correction today. However, right now we don’t see any positive fundamental drivers to fuel a sustained rally in EURUSD and we don’t believe we have seen a bottom in EURUSD yet. The next key support level is 1.2650 – the base of the daily Ichimoku cloud. Below here is the start of a technical downtrend. This is likely to be a sticky level, but we believe it will be breached as fiscal problems in Europe combined with the uncertainty around the fiscal cliff in the US make the dollar a more attractive option than the single currency in the medium-term. Below 1.2650 opens the way to 1.2500 – a resistance zone from August.

Italy claims it will not follow Spain into an aid request

It’s not just Greece in the spotlight. Today Italian and Spanish officials come out to defend their nations’ solvency. An Italian debt agency official said that Italy will aim to sell EU420 – 470 billion of debt next year. This is a hefty debt issuance schedule, which should then fall sharply in the preceding years. The rise in the 10-year GBT yield back above 5% today could give officials in Rome some sleepless nights if yields don’t reverse course in the near-term. The same official made an impassioned case for why Italy is not the same as Spain and how a Spanish bailout request would not push Italy into making an aid request of its own.

In Spain, the Economy Minister said that Spain is “absolutely not” considering a debt restructuring (thus, it is not turning into Greece), however he also said that Spain’s recovery is “almost impossible” with the current doubts about the Eurozone managing to stay together. He said that the Spanish government is fully financed for this year, which means that a bailout request, which would then trigger the OMT programme, is unlikely until the ESM status is clear and Madrid fully understands the “conditionality” tied to such an aid request. This could take some time, especially after ECB President Draghi failed to elaborate on what the extra conditions may be at his press conference last week after the ECB’s monthly meeting.

Can Europe avoid another flare up of the debt crisis?

Spanish bond yields have climbed to their highest level in a month today and are currently just below 5.9%. Spanish yields rose nearly 30 basis points in the last week, and if we continue to see this upward pressure on yields then it is hard to imagine the euro managing to hold up above the base of the daily cloud at 1.2650. Added to this, it could weigh on risky assets more broadly. Due to rising bond yields in Europe’s periphery, the fact the OMT programme remains on ice, the delay with Greece’s next tranche of bailout funds and the prospect of prolonged weak growth and missed fiscal targets, there is a chance that the Eurozone calm could come to an end and we could see another flare-up of the sovereign crisis in the medium term.

One to Watch: GBPUSD

Elsewhere, there have been few fundamental drivers of markets so the key drivers have been technical. After weak GDP data out of Japan USDJPY only managed to sustain a mini rally, and yet again got thwarted at 79.50. Growth fears and the fiscal cliff is limiting yen downside for now. GBPUSD had a very bearish development when it fell through the base of the daily Ichimoku cloud this morning, which is the start of a technical downtrend. 1.59 remains a key resistance level while 1.5850 – the 200-day sma, may act as support in the very short term. It is a big week for the UK. The Bank of England releases its Inflation Report on Wednesday. If we see any sign that the BOE is moving away from QE as a policy tool this could put upward pressure on Gilt yields and also the pound, thus expect some volatility in the near term.

Ahead today, the US session should be quiet and there is no economic data of note. Watch out for headlines from the Eurogroup meeting, also from the press conference between the German and Portuguese leaders that is taking place this afternoon.

GBPUSD daily chart


Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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