THE initial reaction of the currency market to this weekend’s announcement of a €110bn rescue package for Greece was less than overwhelming. After a knee-jerk rally higher at open of trade, euro-dollar slumped all the way to $1.3200 and came within a few points of the lows for the year. What happened? Wasn’t the Greek bailout deal supposed to have pacified investor concerns and put the pair on firm footing?

The problem with this weekend’s EU/IMF deal is that it was too late in coming. The damage in the credit markets had already been done. Furthermore, the sheer scope of the transaction, which had tripled in size from €30bn to €110bn, raised fresh concerns about the expansion of future EU debt obligations.

The rescue package for Greece has become the single biggest bailout of a country ever and as result, the European Central Bank (ECB) will now be forced to maintain a loose monetary policy for a much longer period of time than the market had originally expected. This could be a negative factor for the currency for the foreseeable future, especially if the US economy begins to generate jobs and the Fed starts to contemplate a rate hike before the end of the year while the ECB remains stationary.

Nevertheless, Greece has escaped bankruptcy for now and the credit spreads between Greek bonds and German bunds have started to tighten. I believe credit risk will remain the dominant driver of trade for the euro over the next several weeks. If Greek yields compress further as bond traders gain more confidence in the deal, then the euro-dollar should firm up. The sharp fall in the euro since the start of the year has been an unexpected benefit for export-centric Germany and has led to a stronger-than-expected economic rebound.

If credit concerns start to ease, investors will begin to focus on this growth and push the euro higher. However, if the austerity measures trigger more civil unrest in Greece and credit markets lose faith in the deal, the slide in the euro will resume, with $1.30 quickly coming into view.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at or e-mail