Euro Gyrates as Negative Momentum Accelerates

The Euro experienced a quick dip, but rebounded in the wake of the Greek presidential election which saw market-friendly Dimas fail to win the necessary 180 votes in parliament for approval, achieving only 168 in the third and final ballot. With divergent central bank policies and recent stronger than expected growth numbers in the US it will be hard for the Euro to maintain robust rallies.

Dimas won 160 votes in first round and 168 votes in the second round of the election. Opinion polls have the left-wing Syriza party in the lead, which aims to renegotiate the country’s bailout deal, and put Athens on a collision course with the troika. The 10-year Greek bond versus Bund yield differential gapped out to 805 basis points from levels around 795 basis points ahead of the result, and Greek assets will likely remain under pressure into the national election.

The Russia-Ukraine situation also remains problematic for European assets and the EUR/USD currency pair, while hardening sanctions and declining energy prices and their negative impact on the ruble threaten financial stability in Russia. Also, Lithuania will be joining the Eurozone at the start of the year. There will also be changes within the ECB which is moving to a rotating system for the governing council with the five largest member states sharing only 4 votes and possibly toning down the hawkish views.

Spain releases preliminary inflation data for December on Tuesday, which is expected to show the headline rate falling further into negative territory on the back of lower oil prices. This will add to deflation warnings and the arguments of the doves at the ECB. The new year brings the final reading of the Eurozone Manufacturing PMI for December, which is expected to be confirmed at 50.8), unchanged from the preliminary reading.

Momentum on the Euro remains negative with the MACD (moving average convergence divergence) index recently generating a sell signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average), crossing below the 9-day moving average of the spread.

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