EN:Euro exchange rate (EUR): Analysts at Barclays forecast further weakness
The euro dollar exchange rate is 0.941% higher with 1 EUR = 1.3304 USD.
The pound euro exchange rate is 0.746% lower with 1 GBP = 1.1616 EUR.
The Financial Times reports that EU finance ministers are considering co-ordinated measures to support their banks.
"While details are scant, this is a potentially important story for EUR prospects," says exchange rate analyst Sara Yates at Barclays Capital.
Market concerns about a potential Greek default and euro area banking crisis have risen sharply this week, with banking stocks such as Dexia falling by almost 30%.
This follows the decision to cancel the Eurogroup meeting on the 13th of October, where the 6th tranche of the Greek bailout was expected to be approved.
"It now seems likely that the bailout will be delayed until late October/early November. We believe that with T-bills issuance and expenditure prioritisation the Greece Treasury can hold out through November and that the timing of the bailout seems to be coming increasingly down to the wire," says the exchange rate note.
In a scenario in which the tranche is forthcoming, any admission by Greece that it had failed to meet its deficit target would mean a funding gap that needs to be filled.
One possibility would be to unpick the PSI agreement and impose larger haircuts on banks.
Yates goes on to say:
"Many European banks are systemically important. Further stress on banks would impose substantial credit constraints on the economy, as well as amplifying the spiral between higher yields and rising debt-to-GDP ratios.
"Consequently, co-ordinated moves to shore up European banks would be a crucial step in limiting the contagion from a potentially harder Greek default than the market expects, which would reduce the risk premium on all European currencies versus the USD.
"However, for now, there is a lack of detail and recent experience shows that European political decisions are rarely quick or smooth. Second, bank recapitalisation is a necessary, but not sufficient condition to break the current debt dynamics. We believe further progress on the EFSF, Greece and the ECB's role as part of a co-ordinated package, is also needed."
As such, BarCap believe it is too early for a risk rally to be sustained and therefore, recommend investors continue to use rallies in EURUSD to establish short positions.
