EUR/USD Daily Outlook Feb. 9, 2012

By: Christopher Lewis

EUR/USD continues to grind along as the Greeks and representatives from the Troika hold talks in Athens. The pair has been extremely patient, as the markets in general have as well. The talks are said to be going fairly well, but there have been several rumors and statements saying how close the members are to agreeing. However, at the close for the session, we still wait.

The very idea that a country with roughly the same GDP as the American state of Indiana could hold the markets hostage is somewhat surprising. The truth isn’t that the players are worried about the size of defaults; rather they are worried about credit default swaps, a form of protection that institutions often use to generate a cushion in case of default. The sovereign debt markets are one of the most commonly protected with these things, and the biggest problem that comes out of it is that many of the companies that are selling these CDS’ don’t have the ability to pay them off. The CDS market is about to become quite a bit more well-known if the European situation deteriorates.

The pair will continue to be the focus of trading until this situation comes to a resolution. But as soon as this round of talks ends and is settled, there will be plenty of other things to worry about in Europe going forward. As soon as the Greek situation is settled, one has to think it will only be a matter of time before Portugal or Spain come asking for a haircut on their debts owed as well. Because of this fact alone, we could be talking about sovereign debt a couple of years down the road still. Oh, and then there is the fact that Europe is going into recession. Either way – there are plenty of reasons to think overall the Euro will get hit.

Doji and Indecision

The candle for the session on Wednesday shows just how indecisive the markets are. The doji candle almost looks a bit like a shooting star, but the range is fairly tight, and the inability of the talks to produce some kind of agreement will continue to weigh on the market until they are finished.

EUR/USD Daily 2/9/12

The 1.32 level is an important one, albeit minor in the big scheme of things. The 1.35 level above shall continue to be resistive, and a knee-jerk reaction to the talks to the upside will find the market looking for sellers at that point. The 1.309 level below is supportive. The trade for me will be to look for weakness at 1.35 if the deal gets worked out, or to sell right away if the talks fail. I am still unconvinced about the Euro overall at this point, and am not ready to buy it yet.

Christopher Lewis

Christopher Lewis has been trading Forex for several years. He writes about Forex for many online publications, including his own site, aptly named The Trader Guy.