With negotiations on Greece’s troublesome debt problems still ongoing, remarks penned by European Central Bank President Mario Draghi last week seem to indicate that the institution is preparing for a potential exit of one of the currency union’s members. Despite years of telling both the region and world he was prepared to do “whatever it takes” to keep the monetary union intact, the latest letter addressed to two representatives of the European Parliament confirms that a way out of the Euro exists.

Although the message itself was not widely covered by the mainstream financial news media, the written remarks highlight that policymakers are preparing for what may potentially be inevitable. Alongside news that Greece is entering the next phase of negotiations regarding a further rescue, could Draghi’s comments be potentially paving the way for an upcoming exit? The IMF and Germany in particular, remain at odds regarding the shape and form of any further aid, with the International Monetary Fund calling for haircuts and debt relief.

Draghi Planning to Pivot

Last week’s decision by the European Central Bank came as no surprise to financial markets, with the institution keeping the benchmark interest rate at 0.00% while leaving the deposit rate at -0.40% and maintaining easing of €80 billion ahead of planned tapering. However, the real shocker did not come from the press conference in which Draghi stressed the ability of the Governing Council to adjust policy in either direction based on conditions, but rather a letter to two Italian members of the European Parliament. After years of suggesting that the Central Bank would do anything to maintain the integrity of the currency bloc, Draghi’s comments suggest that there is a way for a country to exit from the EMU.

Although he did not reference any one country by name, Draghi’s letter indicates that theoretically, any member state could exit from its Euro Area obligations should it clear its Target 2 balance. Target 2 is a payments mechanism designed to track the balance of payments within the Euro Area. In the event that a country owes money to other members in the EMU, it must first clear these debts and balances and thereafter would be free to exit. The countries that stand out as potential benefactors of this would potentially be Italy, Spain or Greece, which are in the deficit column, meaning they owe other members whereas Germany stands out as a net creditor to the tune of €754.1 billion.

While Draghi did not outline which countries might be contemplating this move, it marks a serious departure from his policy of the last four years to imply that there was no way to exit to shore up confidence. However, with the political winds rapidly shifting and populism gaining traction across the globe, Eurocrats are becoming increasingly fearful of what this might mean for the upcoming election’s results. As a result, Draghi has no choice but to underscore the risks in any upcoming monetary policy decisions or subsequent speeches due to the grand Euro plan unraveling.Although the Euro has so far been absent a notable reaction, the latest development adds to a series of complications to the outlook, potentially weighing on the currency for the weeks and months to come.

Dollar Pressure Sends EUR/USD Higher

The US dollar has been on the retreat since US President Donald Trump referred to the US currency as “too strong” last week, with the US dollar index touching multi-month lows as anxiety about the outlook for US policy garners increased worry amongst investors. In the meantime, the result for EURUSD has been a climb to 6-week highs in the pair. However, the latest momentum higher does not necessarily imply a change in trend, unless of course prices rise above 1.08775 which marks the top of the latest move lower from December highs to January lows in the pair. Any cross above the 78.6% level could imply a trend reversal, however, it would take a significant break above this level to imply that the longer-term trend was shifting upwards.

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In addition to December highs, resistance sits above the price action at the 200-day moving average and 1.0763. While the Stochastic Oscillator is already trending in overbought territory, other momentum indicators such as the Relative Strength Index imply that the EURUSD pair is not overvalued and could move even higher from its current location. However, any Stochastic crossover back below the overbought threshold could presage a retreat in the currency pair. Depending on the evolution of data throughout the week ahead, EURUSD might have already hit its heights and be preparing for the next leg lower depending on the outcome of upcoming fundamental events.

What Binary Options Traders Should Watch For

With another round of Greek negotiations arriving, focus will undoubtedly shift to its burdensome debt that shows few signs of repayment.Nevertheless, aside from the debt problem which could create another crisis of confidence in the Monetary Union’s ability to steer itself is the forthcoming political risks across Europe.Considering many populists and far-right leaders such as a France’s Marine Le Pen are calling for an exit from the Euro Area’s failed policies, Draghi’s letter might very well be the sign of things to come for the beleaguered currency union.

Besides developments in the Euro Area, GDP data from the United States may also be a momentum driver ahead of the February 1st FOMC meeting. Despite the near-term momentum higher in EURUSD, the downside risks may continue to outweigh the upside potential based on this very backdrop.