Media reports that the ECB would halt monetary policy operations with some Greek banks put the euro on the back foot, highlighting the continued scope for unsettling news. EUR/USD printed a low of 1.26814 early in the European session and was fairly choppy in US trade.
The pair managed a high of 1.27593 early in the US session, and remained stuck in that range. There was a bit of caution as unnamed sources claimed that four Greek banks might be operating with negative equity capital, prompting the ECB to freeze lending to such institutions, which would have to turn to the Bank of Greece for Emergency Liquidity Assistance (ELA), pending recapitalisation.
The ECB later confirmed that some Greek banks have indeed been moved to ELA from the main operations, but that the recapitalisation would be finalised ’soon‘, allowing troubled institutions to return to normal ECB funding channels. Nonetheless, the problems in the Greek banking system (including yesterday's reports of accelerated deposit withdrawals) reinforced a bearish euro call ahead of the June 17 Greek election.
Greece’s Democratic Left leader Fotis Kouvelis said a new caretaker government decided by party leaders would have one task, that of holding elections. He said elections would most likely be held on June 17. President Karolos Papoulias failed to broker a governing coalition in recent meetings.
The deadlock in Greece has sparked uncertainty over the country’s pledged spending cuts required by the terms of its two bailouts worth 240 billion euros ($306 billion), negotiated since May 2010. Although sentiment seems to be somewhat stabilising with most of the Greece bad news priced in, the single currency is likely to encounter selling into strength.