The market was spooked after Greece announced that it was heading back to the polls after the top three parties failed to form a coalition government. Contagion fears have been escalated as the upcoming election in June is more likely a referendum on Greece’s Euro-membership and public opinion seems to favor the anti-bailout parties. The Dollar and the Japanese Yen benefited further from their safe-haven status; before the market closed last week, the Dow-Jones FXCM Dollar Index rallied to its previous high in Oct 2011 at 10,138. However, investors are likely to book their profits in the short term as the negative factors have largely been priced-in. Besides, most major currencies have been trading in the oversold areas and found support at their significant levels last week. Furthermore, a shooting star candlestick pattern has been seen on the DJ-Dollar Index, hinting the Dollar is likely to consolidate its recent gains in the coming weeks before it extends the rally further.
The major currencies are likely to post rebounds in the coming few weeks until the next critical events in June, including the U.S. Non-farm Payrolls and the election in Greece. Before that, investors are watching for the politicians and the ECB to step in, especially if Merkel is willing to reassess her stance on austerity. G8 leaders have urged Merkel to stimulate the euro-zone growth during the weekend and she has recently slightly softened her stance on austerity. The EU leaders are going to meet for an informal summit on Wednesday, and if Merkel hints on any compromise on slowing down the pace of austerity, we may see a relief rally in the short term. The EUR/USD managed to rebound from its yearly low at 1.2640 levels, and the pair may rebound further with first resistance lying at 1.29 levels. Investors should bear in mind that the risk appetite is still very fragile, and it is more important to find an entry level to resell the major pairs rather than catch the rebounds.