While we expect the weak USD will be a prevailing theme into the ‘fiscal cliff’ at the end of this year and into 2013, the crisis in the Eurozone can almost certainly be relied upon to provide pullbacks along the way. Spanish 10-year yields may be holding below the 6.00% level but they are well above their recent lows and there is significant risks that the longer the delay in Spain’s request for a bail-out the higher these yields will trend. Given that it will be an uncomfortable political decision, it is possible that PM Rajoy needs another bout of market pressure to force him to request a bail-out. It is therefore likely that EUR/USD will see pullbacks on a 30-45-day view.
The other main source of potential pullbacks for the EUR in the weeks ahead is Greece. PM Samaras Friday morning stated that Greece can ‘only manage’ until the end of November without the release of the next tranche of its aid package. Austerity is causing the situation to spiral as tax collections decline, employment plunges, and businesses shutter. The deficit target at the moment has been shattered by lacking performance and according to German newspaper Spiegel, the shortfall is €20 billion instead of the projected €12.5 billion. As such, Greece remains a serious downside risk to the EUR in the short to medium term.
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