It has been a rocky ride for the euro over the past few months as the protracted stalemate between Greece and its creditors left investors struggling with direction. Investors have been receiving mixed signals since the start of the year as a bearish outlook for Greece’s future in the eurozone conflicted with improving eurozone labour market and manufacturing data and capital markets boosted by the ECB’s massive €1.1tn QE programme. Bond market volatility saw progressive spikes over the past few months with 30 day trailing volatility for long term bund futures reaching their highest level over the past twelve months. Volatility in ASE general index futures had hit a twelve month low in mid-May as high hopes for a fresh bailout deal saw confidence improve somewhat. However, a run on the banks, similar to that seen at the start of the year has contributed to a substantial spike in volatility as reaction to the latest updates coming from eurozone officials is magnified.
Fears of a Grexit once again popped up as the threat of a Greek default loomed ever closer on missed repayment deadlines and lack of progress. The situation seemed to take a turn for the worst after the IMF, a key negotiating partner between Athens and eurozone lenders, pulled out of talks and understandably this uncertainty has seen the euro trade erratically over the past quarter after a long and drawn out decline since June last year where it traded just shy of 1.4000 against the dollar.
Having lost over 25% since this peak to last quarter’s low of 1.0458, where many analysts had expected it to swing to parity against the dollar, the single currency has struggled to sustain a recovery back to the levels seen last summer. The ECB’s QE programme, which in a climate of negative short term borrowing costs has pushed the eurozone yield curve into negative territory, is expected to remain steadfast at least until the end of the third quarter which could further undermine near term underlying support levels for the single currency.
Negative yields make euro denominated investments unattractive and with ongoing concerns surrounding Greece’s future in the eurozone resistance around 1.1500 has proved difficult to breach with the euro selling off significantly against the dollar when it last attempted to breach this level in May. Stochastics indicate that we could be in for another bout of selling pressure as sentiment remains weak. Hopes of a fresh outcome from today’s emergency meeting of finance ministers in Brussels faded and once again talks are set to continue. With the impending threat of default at the end of this month unless a deal to release €7.2bn of bailout funds can be agreed, we could see the euro trade back towards 1.1000 and below after which the potential to revisit parity with the dollar could be an increasingly likely scenario.