Fears of Default Send Euro Reeling

The optimism of a resolution of the European crisis, especially after Merkel and Sarkozy presented a united front were squashed by Eurogroup head Juncker who first seem to let it slip that a selective default in Greece might take place. 

On Monday, in this space, I suggested the euro would head to $1.4300, sterling $1.42 and the dollar toward JPY78.50.  The dollar has held up a little better against the yen (today's low JPY78.61), but the euro hit $1.4295, the week's high and sterling hit $1.62 today--before the fireworks--disappointing flash PMI and Juncker.  The flash PMI  was 50.4 in manufacutring and 51.4 in the service sector.  Risk is that the rime between the flash and the final, there is more economic slippage.  UK retail sales were above expectations at 0.7%, after a -1.3% print in May.
Separaely note that that Chian's PMI as measured by HSBC fell below the 50 level for the first time in a year and at 48.9 is a 28 month low.  Japan reported a trade surplus, the first in three months. 

But the market's focus today is squarely on the EU summit.  There are long lists of possible courses of action.  There are a three of key points investors should consider. 

First, whatever is decided for Greece needs to be applicable/scale-able for Portugal and Ireland, otherwise there will be no closure. 

Second, there needs to be some preventative measures to build strengthen firewall around Spain and Italy, otherwise relief will be limited. 

Third, actions that need treaty changes to be kept to a minimum otherwise face politcal backlash and potential rejections.

While I had warned of buy the rumor sell the fact type of trading today, an adjustment of positions took place prior to the start of the summit and this has left short-term technical indicators over-extended.  The sell-off brought th euro within few ticks of yesterday's low ($1.4138 vs $1.4134).  There is also a retracement objective near $1.4120.   A break of these supports for damage the technical condition for the euro.  On the upside, resistance near $1.4200-$1.4220 may cap corrective bounces.    Sterling has the potential to retest the $1.61.80-$1.6200 area. 
Fears of Default Send Euro Reeling Fears of Default Send Euro Reeling Reviewed by Marc Chandler on July 21, 2011 Rating: 5
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