Greece’s second bail-out met with relief

European Union flags

Forex traders and strategists have widely welcomed a second bail-out package for Greece announced by eurozone heads of state on July 21. The agreement will see a new programme of support amounting to roughly €109 billion, under which the private sector will also contribute €37 billion.

Forex markets greeted the news with relief, with eurodollar rising to 1.4437 in intraday trading on July 22, having been at 1.38 earlier this month. Meanwhile EUR/CHF traded at 1.1890 and EUR/GBP touched 0.8853.

"The market has been trading heavily around headline pieces of news rather than fundamentals for several weeks and that has led to some crisis fatigue, so there has certainly been some relief rally, but there might still be choppy times ahead for the eurozone," says Peter Billington, global head of FX trading at Commerzbank in London.

Billington highlights the exceptional correlation between asset classes over recent weeks and expresses his hope that the latest rescue package will herald a move to trade more on fundamentals rather than headline news.

"Correlation between credit spreads, bunds and some currencies have been unprecedented during the crisis, as everyone had a certain mindset on how the markets were trading. My hope is that the FX market will now return to near-normal, but the devil will be in the detail of this package," he says.

Meanwhile strategists also welcomed the eurozone news and suggested it could mark a turning point, albeit with some potential stumbling blocks ahead. The consensus view of contributors to FX Week's one-month currency forecast for eurodollar moved up to 1.4226 on Friday, having been at 1.4192 the week before.

But in a research note published last Friday, strategists at Barclays Capital highlighted continuing concerns. "The initial market response to the outcome of the extraordinary EU summit on July 21 was more positive. Uncertainties remain, most importantly a lack of clarity about the details of the private sector involvement in the process. And it did little to address the causes behind the crisis: a lack of automatic fiscal transfers, a need for structural reform in the periphery and a common financial regulatory body," says Paul Robinson, head of FX strategy at Barclays Capital in London.

Adam Cole, global head of FX strategy at RBC Capital Markets in London, believes the rescue package removes some uncertainty and the threat of contagion to Spain or Italy, but he expects further pain ahead as the terms of the deal are implemented.

"In the near term this takes out contagion risk – we think the euro can continue to push higher from here as some of the risk premium it's been carrying starts to unwind. In the longer term there are still issues that could come back to haunt the currency – in particular the changes to the mandate of the European Financial Stability Facility will need ratification by all the individual member states and that might not be quick or smooth," says Cole.

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