Much the relief of global capital markets the pro-bailout New Democracy party edged out the far left Syriza party in Greek elections today, but the reaction was much more positive in equities than in currencies as investors remained cautious about the prospects to resolve the EZ credit crisis. New Democracy won 29.7% of the vote compared to 26.9% for Syriza and together with Pasok it now held 162 seats in the Greek Parliament obtaining a chance to form the next government.

Most analysts believe that despite the win by New Democracy, Greece will not be able to abide by the terms of the bailout and will eventually have to leave the EMU given its massive debt load and it wrecked economy. However, the election results delayed any immediate chance of exit and the country will now likely receive its next tranche of funds from Troika allowing it to function for the next few months.

Although the danger of “Grexit” appears to have diminished, currency investors remained wary about the broader EZ credit markets with peripheral bonds giving up their early gains by the start of European trade. After gap opening higher in Asia at it quickly rose to 1.2748, the EUR/USD has been drifting lower to 1.2680 in early European dealing as hedge funds faded the move while sovereign funds were the primary buyers.

With a strong rally into Friday’s close as traders anticipated the pro-bailout win, much the good news was already baked into the pair. Now that the political drama has passed, the economic problems remain and the prospect of eventual Greek default continues to concern the currency markets. Furthermore with the credit crisis now spreading to the much more important southern European economies of Spain and Italy, the Greek elections are being viewed as a sideshow to the much larger problems of the EU as a whole.

For the time being the Greek elections results should serve as a modest point of support for the EUR/USD with the pair holding steady at the 1.2600 level. However, unless EZ officials move quickly to a more accommodative monetary policy and a serious discussion of a fiscal union, the relief rally in the EUR/USD will dissipate within days as credit concerns continue to depress the market.

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