ForexSpace.com - Forex news reports how EUR/GBP has tumbled to threaten 0.7975 on the fresh election in Greece, with Sunday June 17 hotly tipped as the date for the repeat election. Recent opinion polls suggest anti-bailout Syriza will win, fueling rampant speculation of a Greek euro exit. Indeed, along with forex traders, brokers and top financial institutions, just about everyone is now pricing in what - as SEC characterize in a research notes - will be a de facto referendum on whether or not Greece wishes to remain in the euro.

Yesterday a domestic poll showed that 78 percent of Greeks wished to retain the euro, whilst only 23 percent said they preferred further elections to take place. Conversely, the SEC research suggests, pessimists will argue that the country has passed the point of no return and that the election outcome will facilitate its eventual abandonment of the euro, paving the way for a similar (and potentially much more serious) exit by other vulnerable GIIPS countries. Consequently, the immediate question is whether Greece will move towards a fresh election (which looks likely), and also whether the Greek people will vote according to their stated preference to remain in the euro-zone (which appears very uncertain).

With the Troika still maintaining its negotiating position, Greece must either elect a government able and willing to make budget savings or accept it must leave the euro. Given current globally unprecedented uncertainties and the clearly negative developments taking place, SEC feel compelled to adopt a more defensive stance than previously, and therefore lower its SEK and AUD forecasts even further.     

In terms of the EUR/USD, barriers expire tomorrow (Wednesday), but the reality is that little defense has been offered, with a new four-month low of 1.2785 having been recorded. This coincides with a trend line (1.2780/85), so we can expect more stops below, while next options plays are said to be 1.2750 and then 1.2700.

Thus the news from Greece pushed shares lower, with European shares conceding earlier gains to fall to their lowest level since the start of 2012; the Athens stock market fell to its lowest level since 1992. The yield on Greek 10-year bonds soared 110 basis points to 27.4 percent, while Italian bond yields briefly rose above 6 percent, where Spain's are already trading.

So, with so much uncertainty and turmoil, why is the FX market not in full panic mode?  Although there is no definitive answer to this, Kathleen Brooks (pictured), research director of FOREX.com, says how volatility remains incredibly low, and – as she and her colleagues have pointed out in the past – are below the highs reached back in autumn 2011.

“The Vix index is currently around the 21/22 level, yet back them it surged to 48.00,” says Brooks. “Thus, either the backdrop has stabilised since then, which means the Greek political crisis is more manageable than it was a few months back, or a strong Germany is enough to placate investors. A strong Germany that may be willing to tolerate higher inflation than in the past could allow the ECB to either 1, cut interest rates or 2, pump the currency bloc with more liquidity. Investors love liquidity, hence this may be one of the reasons why the FX world is not in panic mode just yet.”

Rather, Brooks along with a host of forex traders and top forex brokers are seeing the bulk of euro zone stress manifest itself in European stock markets, most notably the Spanish Ibex, which has retraced to its lowest level since the dotcom crash. Meanwhile, in Italy, the FTSE MIB index is at its lowest level since the financial crisis in 2009. The market cap of the entire Ibex has dwindled to EU 261.4bn.

In perspective, Germany’s economy is EU 2.5trillion, thus Germany does have the financial firepower to support Spain and protect the currency bloc. But, as Brooks adds: “Until it <Germany> steps up to the plate, the financial sector in Europe is likely to remain under considerable downward pressure. The European banking index has fallen by more than 20 percent since March, while the US banking sector is down by 7 percent in the same time period,” says Brooks, “highlighting the problems afflicting the region.”

Therefore it can be seen how the symbiotic links between European sovereigns and the banking sector means that Spanish banks, in particular, are likely to remain vulnerable while Spanish 10-year bond yields are above 6 percent. Likewise, Italian banks were downgraded again last night by Moody’s, which will make it harder for their stock prices to rally any time soon.

Drew Hillier. Editor