EUR/USD Steady Around 1.1250 on Greece Default Fears

The euro was held hostage by the crisis in Greece on Wednesday while the dollar held firm after solid U.S. housing data bolstered the case for the U.S. Federal Reserve starting rate hikes as early as in September.  The euro was little changed at $1.1261 GBP=, having slipped from Tuesday’s high of $1.1330. Although it remained in a familiar range between $1.11 and $1.14 in recent days, traders see this as the calm before storm rather than a sign of stability.

Athens showed no sign of backing off in its tense negotiations with creditors as Prime Minister Alexis Tsipras accused them of trying to “humiliate” Greeks with more cuts.  His comments suggested he has no intention of making a last-minute U-turn and accepting austerity cuts needed to unlock frozen aid and avoid a debt default within two weeks. This sent European stock prices to the lowest level since February.

While recent rises in European bond yields raised the attraction of investing in euro zone bonds and underpinned the currency, caution on the euro’s downside is also clear in the option market.  Risk reversal spread EUR1MRR=FN of the euro/dollar widened in favor of euro/dollar puts to the highest level in about two months, suggesting many investors want to hedge against the euro’s fall.