Fundamental Forecast for the Euro: Bearish

The euro ended the week down 0.36% against the greenback despite a .66% rally on Friday. News that officials had devised an aid package for debt stricken Greece that would include voluntary private sector participation saw a reprieve to the heavy selling pressure the euro suffered earlier in the week. The announcement eased concerns fueled by German demands that bondholders hold the bulk share of the Greek bailout. The euro’s rally is likely to be short lived as additional bailouts are seen as a short-term liquidity solution to a larger solvency problem.

The situation in Greece continues to weigh heavily on market sentiment as contagion fears take root, with further declines expected for the single currency. On Sunday the EU will convene for a meeting on the Greek bailout with European Finance Ministers meeting in Luxembourg the day after. As officials struggle to reach a consensus on the terms of additional aid, traders will remain poised to react on further developments. And while Trichet cited the much anticipated “Strong vigilance” language to signal a further rate hikes at last week’s ECB rate decision, the euro has been unable to shake the downward pressure fueled by scenes of Greek anti-austerity protestors taking to the streets.

The euro’s gains on Friday were further hampered by reports that Moody’s was placing Italy’s aA2 rating on review for possible downgrade. The rating agency cited that “economic growth challenges due to macroeconomic structural weaknesses and a likely rise in interest rates over time,” may impeded the nation’s ability to implement, “fiscal consolidation plans that are required to reduce Italy’s stock of debt and keep it at affordable levels.” Needless to say, the news is likely to keep pressure on the euro as contagion fears are rekindled.

The single currency broke below the key 61.8% long-term Fibonacci extension taken from the June 6th 2010 and January 10th troughs at 1.4330, suggesting further losses Downside targets are eyed at the 1.42-figure backed by 1.4130 and 1.4080. Topside resistance is seen holding at 1.4330, with subsequent ceilings seen at 1.4450 and the 1.45-handle.

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