The market is opening slightly down into the new week in a hangover stemming from what is now been dubbed “Europe’s Grand Plan.”
The “Grand Plan” to address the debt crisis in the European Union is scheduled to be finalized this weekend and then presented the following week at the G20 Summit in Cannes.
The main components of the plan revolve around new capital for banks, a plan to leverage the European Financial Stability Fund up to about 2 trillion euros ($2.8 trillion) and much-needed debt relief for Greece.
The optimism surrounding the “Grand Plan” has resulted in a euro/dollar rally that has allowed the euro to retrace back toward $1.4000 levels while taking the risk-on Aussie dollar (FXA, quote) as high as $1.0370.
However, as we have stated in previous blogs, we continue to believe the current rally in the markets is a correction and see greater risk of a weaker euro (FXE, quote) against USD strength over the coming sessions
While traders see the proposed plan to deal with the current crisis in Europe as positive in the short term, there are still huge problems that need to be fixed before the market can even look at longer-term fundamentals.
Over the weekend, several officials release statements sharing these sentiments. One point highlighted by many is concern with the Greek component of the plan, which seems to still be very much up in the air.
German Finance Minister Wolfgang Schaeuble has noted that “a lasting solution for Greece would not be possible without a debt write-down, which would likely involve larger haircuts for private holders than the 21% already agreed upon in July’s summit.”
This could mean even more funding pressures on heavily exposed banks and new threats to sovereign debt ratings. France’s rating in particular could be compromised, with the country’s bond spreads still widening out to record levels.
The technical outlook aligns well with the fundamental sentiment above. Although there has been sizable rallies across most of the major currencies against the U.S. dollar over the past several days, the price action appears to be corrective, with a new higher low sought out in the USD ahead of the next major upside move.
Europe’s economic calendar is completely empty. Traders are in a wait-and-see mode as they look for signs from Europe.