The Greek Tragedy: Its Impact on the EUR/USD

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The EUR/USD is the most actively traded currency pair in the world which comes as no surprise since the United States and the European Union are the two largest economic entities in the world. It is for this reason that almost any event taking place across the globe has a direct influence on the value of the EUR/USD pair. Economic and political news originating from Europe or the United States can cause the most troublesome reaction.

At the moment, all eyes are focused on the financial crises taking place in Greece and China. Since China is not a member of the Eurozone, the group of countries using the euro as their common currency, the effect of what is happening in Asia is not significantly felt on the EUR/USD. However, the economic meltdown in Greece and the possibility of the country’s exit from the Eurozone directly influences the value of the pair.

Events in Greece have made the headlines more than any other financial news these past four months but for whatever reason, the euro has remained steady and the price fluctuation of the EUR/USD has not been felt much. Now that the countdown is nearing its end and it looks like there will be a Grexit, the effects of the change are kicking in and the EUR/USD has been dropping steadily.

Wednesday saw a sharp descent in the EUR/USD as investors try to figure out exactly what Athens will do to dig itself out of this financial tragedy. Voters sounded an emphatic ‘No’ to the referendum which offered some sort of bailout plan by the ECB. This resulted in the immediate resignation Greek finance minister Yanis Varoufakis who had voiced his opposition to the referendum.

Any positive news regarding Greece and a possible deal would help support the euro. Prime Minister Alexis Tsipras has until the end of the day to come up with a working plan that would offer acceptable reforms to the Eurozone leaders. Should a deal indeed come to fruition, one could expect a positive initial reaction by the EUR/USD. A dead end, no-deal scenario, on the other hand, would cause the euro to fall even more.

But even if an agreement between Greece and its debtors is reached, there is little reason to believe that the EUR/USD will remain strong after its initial boost and in fact, there may be no way the currency will stay up for any real length of time. The euro has been bolstered by rising yields in government bonds and these have been falling of late. Any Greek deal would push equity prices up and bring yields down even further putting more pressure on the euro. Not helping the matter is the increasing interest rate difference between the US and Eurozone.

And if the two sides can’t get together at all and Greece has to turn to another currency—drachma? Bitcoin?—in order to keep its country out of total bankruptcy, the EUR/USD will still be in a bad position. Is it any wonder that investors as well as economic analysts are at a loss of what to do next?

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