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Will Greek stocks' free fall take Euro down too?

Forex

Will Greek stocks’ free fall take Euro down too?

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The Athens General Index (GD.AT) added 13 percent over last week’s trading session after plunging 70% following political instability in Greece and the recent elections results. Meanwhile the Euro recovered some pips against the Dollar before European Central Bank’s (ECB) decision to stop accepting Greek government bonds as collateral from local lenders went public.

The Impact On The EUR/USD

The Euro has gained a bit against the Dollar over the last week’s trading session. Yet, it’s down 20 percent since May 2014, from about 1.3850 to 1.1320 today.

To forecast the pair’s trend, let’s have a look at last week’s events. The two most important events following Draghi’s quantitative easing were both related to Greece.

Early that week was the election result in Greece. The radical left-wing Syriza party won a majority of voters and formed a coalition government with the 6th elected party. Syriza is threatening to exit the Eurozone, an act that surely causes a banking crisis and damages the Eurozone economy. In the long run, that can weaken the Euro currency against all major currencies, especially the US Dollar. The investors would prefer to invest in the greenback following the economy improvement, as indicated by the recently released Federal Reserve data.

What also contributes to the weakness of EUR/USD was European Central Bank’s decision to reject the Greek government bonds as collateral in funding. The surprising decision is increasing the uncertainty of the Greek government’s ability to pay its debt to the Eurozone.

In short-term trading, on the other hand, Euro may continue its recovery against the Dollar through late February, when Greece will have to come to an agreement with its creditors. A failure in negotiations will spark a new downfall for Euro.

The EUR/USD Is Facing Up In Short-Term Trading

eurusd-weekly-chart

The chart above indicates that EUR/USD is clearly on a down trend, and we’re also expecting this trend to continue.

However, EUR/USD’s recovery from 1.1098 could extend higher to 1.20 to test the 61.8% Fibonacci retracement level. The Fibonacci levels technique is used to identify potential price levels where the retracement completes, and the trend resumes.

According to the technical analysis, there’s one more reason the retracement to end there. And that’s the open gap down that occurred on the very first day of trading in 2015! Not to mention, the crucial round number. But first, we need to see if Euro is strong enough for a pullback.

Greek Stock Market General Index Forecast

athens-stock-exchange-index

The Greek stock Exchange general index has pulled back lately, after hitting the lowest level in two years.  The free fall happened following geo-political instability in the country that led to the recent election. Then came the shocking European Central Bank’s decision to cancel its acceptance of Greek bonds that pushed the index price further below. Yet, the index may begin its pullback to higher prices, depending on whether the Greek government will settle on an agreement with the creditors.

The Athens Stock Exchange General Index closed at 803 points on Friday, up from 721.92  points earlier this week, increasing by 12 percent. The index has fallen 70 percent from the 2014 high. As we can see from the chart above, we expect the index to go up toward the 200-day moving average. Let’s not forget though, that the index is trading downwards and this trend is likely to resume after the pullback to the moving average level. Most probably during February. But will the retracement even take place?

EUR/USD and Greek stock market seem to go hand in hand lately. Let’s hope that it’s not an “if I go down, you go down” thing!

Featured image via Flickr

Jim entered the financial world by trading sports and now invests in US stock markets and forex, trying to buy low and sell high. Connect with Jim: StockTwits | TradingView