EUR: Re-focus on fundamentals augurs for EURUSD downside

Last week's price action was suggestive of the market's desire to move past the Greek political uncertainty and re-engage in fundamental positions, including using the EUR as the funding currency of choice and being short EURUSD. 

"With the Greek political uncertainty subsiding in the near term, following the Greek parliament passing the initial reform bills, the Eurogroup subsequently agreeing to the three-year ESM program and the German parliament backing the Greek aid talks, we see increased willingness of investors to re-engage in some of their core positions. As a result, we recommend staying short EURUSD spot," says Barclys.

Other than the second round of reforms that need to be approved in Greek parliament next Wednesday, attention should be focused on the Cabinet reshuffling Tsipras will shortly have to do, given that the government is no longer able to pass bills without at least some support from opposition parties.

"Our bearish EUR view will be supported by the ECB's commitment to its QE program. Indeed, we think that the ECB will indeed continue its monthly asset purchases at the same pace until September 2016, and probably even longer as we believe the increase in inflation will likely be slower than the ECB currently projects. Moreover, we believe that the chance that additional measures will be announced by the end of this year is not negligible and will depend on financial market developments, especially in conjunction with upcoming discussions about the third Greek bailout," added Barclyas. 

On the data front, euro area flash composite PMI is expected to moderate slightly in July to 54.0, after June's four-year peak. We should see some consolidation in French PMIs, following last month's jump, while in Germany confidence should improve modestly, recovering from May trough. Uncertainty related to the Greek crisis might have dampened confidence, adding downside risks to the forecasts.