Forex Flash: Political risk portends EUR/USD bear phase – UBS

Stung by the return of political risk in the Eurozone, investors have become far more hesitant in putting euro longs back on. “Our Fixed Income Strategy team has noted in their European Rates Weekly that the 'rally in the periphery is over', and even an 'extended' bear phase could emerge as investors start to zone in on politics, and more importantly, growth.” writes Gareth Berry, a Research Analyst at UBS.

So, where does this leave the euro? Contrary to expectations of a meltdown, beyond a rather large single day move on Monday, and on some isolated pairs, the euro has not exactly underperformed. The market is far calmer in its response, especially compared to the outcome of the first round of the Greek elections last year where anti-austerity and 'protest-vote' parties were standout beneficiaries. In short,” the euro is starting to build up immunity, and in the short term, it may yet extend, regardless of what the fixed income market is signaling. So far this year there has been the perception that the euro has been one of the best performers. True, the clear out on Tuesday has taken the shine off the currency, and as of end-2012 the EUR/USD is even slightly lower on the year.” Berry points out.