Euro Dragged Lower on Greece Uncertainty

NEW YORK (BBH FX Strategy) -- The dollar looks set to begin the week higher as the momentum from Friday's jobs report fades and the market refocuses its attention on Greek.

In particular, the dollar moved higher in Asia and into the European session prompted by the failure of Greek political leaders to reach an agreement on European Union/International Monetary Fund demands for further austerity. While an agreement was struck in principle, the devil, as is often the case, is in the details. The key sticking point in Greece and between it and the EU/IMF is wage cuts -- EU/IMF demanding 25% cut in wages and an end to the 13-to-14 month bonus payments.

As a result, the euro is currently down 0.75% to 1.306, with sterling also down 0.3% to 1.57 amid the stronger dollar tone.

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No PSI deal seems likely today, as Greek Finance Minister Venizelos will reportedly meet with the eurogroup finance ministers on Wednesday. He warned that the PSI is now the easiest part of the aid package and that Troika demands for greater austerity are the more difficult point.

All signs point to an eventual PSI deal, but what is now more uncertain is whether Greece's coalition government can agree on an additional 1.5% of GDP in savings as demanded by the Troika before it can receive the next tranche of aid from the IMF/EU. These funds are needed by mid-March, when a huge slug of debt matures (over 14 billion euros) and must be rolled over. Some coalition members have already signaled unwillingness to pass more austerity measures, and so it seems Greek disorderly default risks will remain elevated even if PSI agreement is reached.

Price action today would seem to support this view of elevated eurozone risks, as the euro has sold off despite stronger-than-expected German factory orders. Netherlands already sold debt, while France is on tap to auction 8.5 billion euros in bills later today. Besides the 1.3030 low from last week, 1.30 is the 38% Fibonacci retracement of the January rise in EUR/USD. Break of 1.30 area sets up a test of 1.2929, the 50% level.