Weekly Review and Outlook EUR/USD Held 1.4 as Greek Worries Eased

As the Greek drama developed, EUR/USD managed to hold on to 1.4 psychological level and staged an impressive rebound towards the end of the week. Fundamentally, there seems to finally reachable resolutions in the immediate and longer term Greece debt problems. European Union Economics Commissioner Olli Rehn pledged that Greece would receive the next tranche of payment from the EUR 110b EU/IMF bailout fund in early July to rollover maturing debts through September. . IMF has also agreed to release the payment should Greece pass the new austerity measures. Greek Prime Minister George Papandreou announced a reshuffled cabinet on Friday with political heavyweight Evangelos Venizelos replacing George Papaconstantinou as Finance minister. The reshuffling should help Papandreou secure party backing for approving the austerity measures. So the near term problem should be eased for the moment.

On Friday, there was also a major breakthrough on forming the second bailout package for Greece. Germany has been insistent on stronger way to involve private bond holders in the bailout out, by forcing extension on the maturity of Greek bond by seven years. However, that faced strong opposition from ECB, which insisted that private sectors' involvement must be temporary. Finally, after a meeting with French President Nicholas Sarkozy German Chancellor Angela Merkel compromised and said they will support a new bailout package for Greece that includes "fully voluntary" participation of private Greek bond holders. The new package will be modeled on Vienna Initiative, which tens of billions dollars were lent to struggling Eastern European nations in 2009, on condition that foreign banks maintained their lending. Merkel said that they do "everything together" with ECB, IMF and EC Commission and they didn't want to "create a credit event".

So the next step is, EU finance minister are meeting on Sunday and Monday to agree on paying the next installment of bailout loans to Greece. More importantly, they'll continue the negotiation of the second bailout package. German Finance Ministry spokesman said that ideally, a solution and an agreement to "key elements of the program" would be found on Monday. There were talks that the package will total EUR 150b, with EUR 80b in additional aid from EU. Another 30-40b would be from voluntary rollover of Greece debts and EUR 50b from privatization. Also, the reshuffled cabinet of Greece will face a confidence vote by Tuesday night.

Technically, EUR/USD's strong rebound from 1.4073 last week argues that price actions from May high of 1.4939 are not developing into a deep correction through 1.4 level. But rather, it could indeed be a sideway triangle patter between 1.4 and 1.5. That is, we could see EUR/USD gyrate between 1.4 and 1.47 in near term for possible a few more weeks and then stage an explore rise above 1.5 level to finish of the medium term rally from 1.2873. Similar pattern is seen in EUR/GBP where the cross is possibly forming a triangle pattern from 0.9042, and above 0.8610. EUR/CHF did made another record low last week and breached 1.2 level but it's also continuing to lose downside momentum.

Nevertheless, the outlook in EUR/JPY is clearly week and further decline should be seen to 110 psychological level in near term after taking out 113.41 support. Also, the resolution in the Greece debt problem might not help Euro against commodity currencies as risk appetite would boost the latter more. EUR/AUD's near term bias is clearly on the downside for 1.3228. At this point, we're still slightly favoring the case that medium term rebound from 1.2926 has completed at 1.4341 already. A break of 1.3228 support will affirm this case and should bring deeper fall for a retest on 1.2926 low at least.

The outlook in dollar index is a bit mixed for the moment. The index faced strong resistance from medium term falling trend line and dropped sharply towards the end of the week. Firstly, 76.36 resistance still holds. Secondly the break of 74.96 argues that recovery from 73.50 has already finished. And,, with the medium term trend line resistance intact, we don't have enough evidence to turn bullish in the index yet. Dollar index would possibly remain mixed in near term, as on the one hand pressured by near term strength in Euro. And, on the other hand, supported by weakness in commodities which sees crude oil drops towards 90 psychological level.  

The Week Ahead

Reactions to EU finance minister meeting would be the initial focus, as well as political developments in Greece. Meanwhile, BoE minutes will also be a major focus. Ben Broadbent replaced Andrew Sentance in this month's meeting and all eyes will be on how his stance compare to the ultra hawk Sentance. FOMC meeting will be another major focus. Fed will announce the end of QE2 but attention will be on whether, and how, Fed would leave the option open for restarting quantitative easing. Economic projections will also be updated and it's expected that growth forecast for this year will be lowered and unemployment raised. Bernanke will also hold his second post meeting press conference.

Here are some of the key events this week:

• Monday: UK Right move house price; Japan trade balance; EU meeting, German PPI, Eurozone current account
• Tuesday: RBA minutes; UK public sector net borrowing; German ZEW; Canada retail sales; US existing home sales
• Wednesday: BoE minutes; Swiss ZEW; FOMC rate decision
• Thursday: Swiss trade balance; Eurozone PMIs; US jobless claims, new home sales
• Friday: German Ifo; US durable goods orders; US GDP final

EUR/USD Weekly Outlook

EUR/USD dropped to as low as 1.4073 last week but rebounded strongly from there. The break of 1.4320 resistance argues that fall from 1.4695 has finished already. The development also suggest that price actions from 1.4939 could indeed be consolidation only, in form of triangle. Initial bias is mildly on the upside this week for upper trend line resistance (now at 1.4612) first. Further break of 1.4695 resistance will be the first signal of up trend resumption for another high above 1.4939. On the downside, though, below 1.4073 will flip bias back to the downside for 1.3969 and below instead.

In the bigger picture, EUR/USD is still trading above medium term trend line support from 1.1875 (now at 1.3606) and thus, rise from there should still be in progress. We'd continue to favor the bullish case that correction from 1.6039 has completed with three waves down to 1.1875 already and. Above 1.4938 will target 1.5143 resistance first. Break will affirm the bullish case of long term up trend resumption for another high above 1.6039. However, sustained trading below the mentioned trend line support will indicate that there should at least be one more medium term decline, possibly for below 1.1875, before correction from 1.6039 completes.

In the long term picture, correction from 1.6039 might have completed at 1.1875 already. Meanwhile, up trend from 2000 low of 0.8223 might be resuming. Break of 1.5143 resistance will affirm this case and should pave the wave through 2008 high of 1.6039 to 61.8% projection of 0.8223 to 1.6039 from 1.1875 at 1.6705.