The euro continues to fall and there is really no end in sight. The market has zeroed in on Greece and it’s going to push until the story breaks. It’s looking increasingly like Greece will be bailed out as bond vigilantes bump Greek sovereigns.

Even if a solution is found to the problems in Greece, then the market will turn to Spain, Portugal, Ireland and Italy as the next victims. Today Spain released unemployment at 18.8% and a day earlier Portugal’s government released data on an extremely high budget deficit. Portugal’s central bank Governor Victor Constancio said “nobody expected” such a high deficit and that “the next few years will be more difficult.”

All of this has been priced into the market, and that’s why EUR/USD looks like this:

It has been a swift and incredible fall from 1.51. We’re not prepared to make a short-term call because we see the risk of a fall to support at 1.3748 and a short-squeeze to 1.42 as an equally balanced trade.

What we are wonering about is how the market is going to interpret what’s next for Greece. At the moment, there is no reason for the events in Greece to come to a head. Just last week, Greece raised $9 billion euros in a debt auction that was five times oversubscribed. A real funding crunch is nowhere on the horizon yet with Greece destined to remain on the front page for at least the next week, we feel like the market is going to force some action.

European officials have made it clear that Greece won’t be forced out of the eurozone and there are murmurings that the EU is preparing a bailout. We wonder how a bailout will be interpreted. In the short-term it would devestate the bond vigilantes and we lean towards thinking the stability generated from such a move would be a euro-positive. It would undoubtably cause some of the euro shorts to cover and that should cause the snap-back rally we fear.

On the other hand, a bailout would absolutely send the wrong signals to the other eurozone members in trouble and it would anger the fiscally responsible Germans. It’s the sort of thing that could lead to the eventual demise, or reformation of the euro.

As you can see, the euroarea is in a jam with no easy solutions. For the foreseeable future, we will be looking for rebounds and using them as opportunities to sell.