Euro Loses Steam as Greek Relief Wanes

EUR/USD Fundamental Analysis

The Euro is believed to halt its gains opposite the US dollar today as relief regarding a new debt plan for Greece turned to unease over the looming US fiscal crisis. Although the deal ratcheted out yesterday paved the way for the release of long-delayed emergency aid for Greece, analysts warn that many questions remain unanswered. Meanwhile, comments made by US Senate Majority Leader Harry Reid sparked concerns that Congress would be unable to avoid a fiscal cliff.

Although international lenders agreed on a plan to cut Greek debt yesterday, allowing Greece to secure more financial aid and avoid a catastrophic default, market skepticism is growing over the lack of detail on how Greece will implement the reforms needed to meet the new targets. Analysts caution that Greece could still be forced to exit the Euro Zone, largely because the agreement fails to address the need for the debt-struck nation to revive its economy or discourage the government to seek outside financial help. Christine Lagarde, managing director of the International Monetary Fund, appeared hesitant about the deal, questioning whether the ambitious goals in the next eight years could be enforced.

Lagarde warned Greece’s creditors that they needed to ease repayment terms immediately and offer more relief once the country hit budget targets that can place it on a path to sustainable debt by the end of the decade. In addition, the deal still needs approval by some national parliaments, including Germany, where the prospect of sending new bailout money to Greece is viewed as politically unattainable. The lack of clarity over the buyback plan was also another matter of concern among investors. Analysts said that they expected Euro area states to lend Greece money to buy back its own bonds from private investors at discounted prices. However, there remain questions about the plan, including when it would take place and whether bondholders would accept the terms.

Across, the Atlantic, fiscal concerns are also high on investors’ minds. Speaking to reporters, Senator Harry Reid expressed disappointment over “little progress” made in negotiations to resolve the fiscal cliff of tax increases and spending cuts. In its economic outlook released yesterday, the Organization for Economic Cooperation and Development suggested that a potential failure to prevent the fiscal cliff would increase the risk of a global recession. Unless Congress gets its act together, $607 Billion in federal spending cuts and tax increases are scheduled to take effect early next year, boding grimly for the US and the global economy. Considering these factors, a short position is recommended for the EUR/USD trades today.

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