Will the Euro slide or rally after the Cyprus Bailout Deal?

Where does the last-gasp Cyprus bailout terms leave the Euro in upcoming Forex trade?

After weeks of deliberations and an 11th hour play on Sunday evening, the Eurozone, Troika and Cyprus agreed new terms on a €10 billion bailout for the troubled island nation.

Under the new bailout’s conditions is the key clause that all bank deposits under €100k would be protected and not taxed, as with the previous proposal.  Deposits greater than €100k, as well as insolvent loans, will be placed in the country’s soon-to-be bad bank; the second largest bank in Cyprus: Laiki.  Avoiding an effective tax on all bank deposits, which triggered the bank-run that was witnessed last week, is something of a coup for the Cypriot government.

Despite the flurry of withdrawals of capital from Cyprus’ banks last week, the Euro has performed relatively well in recent Forex trade.  For example, the EUR/USD cross defended a key level last week, the 200 Daily Moving Average of 1.2870/80.

Similarly on Sunday the Euro was quick to rally back on good news, after initially dipping when it appeared that no bailout agreement was forthcoming and that President Anastasaides was on the verge of resigning.  This dip only ever reached 1.2940, with the resulting rally hitting 1.3050 at one stage, with investors taking the chance to fade the rally at that level.

So, where does that leave the beleaguered single currency now that a bailout has been agreed?

Any show of confidence or support is likely to be short-lived. Getting to this last bailout agreement was a struggle to say the least. Any hopes that Cyprus was a “unique” case is likely to be ignored by Forex traders. Trader sentiment and confidence is likely to be checked while doubts remain over whether or not a precedent has been set with the whole deposit ‘tax’ fiasco. The Euro and its crosses will feel the effects as a result.

The nonchalant nature of agreeing to tax bank deposits initially is likely to leave investors wondering what is stopping the Troika from wanting to apply the same medicine to Spanish and Italian banks.

While this deal has belatedly postponed (not cancelled) the idea of taxing all depositors for the bailout to go ahead, the tone given by some German ministers in particular does little to dispel the thoughts that the method may be revisited in the future.  This is likely to curb any risk sentiment in the currency game, and indeed the wider financial market, for the time being at least.  In fact, shares in Spain’s Bancaria took a turn for the worst in Monday’s morning session, while ratings agency Moody also gave a grim assessment on the credit ratings of some French banks.

Range wise, the curb on risk sentiment means we will likely see the EUR/USD pair below the flagship 1.3000 level for the near-term.  There is initial support for the pair at 1.2980 and if we see a sustained break below, we could see a test of 1.2920/30 with stops below for 1.2840 area. Longer term we could see a test of the 1.2660/90 lows, last seen in mid November last year.

In a more optimistic point of view, further consolidation in the 1.2980 to 1.3050 range may instil some confidence for a test above 1.3050/60, which would open up technical resistance level at 1.3130 (38.2% retracement). Above here stops are reported circa 1.3160 and a decisive break could see 1.3390/00 in play.

Written by ETX Capital.