Euro gives up its gains, GBP tracks lower

Although attention may briefly turn to the Fed FOMC outcome tomorrow the lack of progress to resolve’s Europe’s crisis threatens to inflict much more severe damage onto global markets. Against this background the European summit at the end of the week will be particularly important but the scope for disappointment remains high.

As with news of Spain’s banking bailout the positive EUR reaction to the Greek elections has faded even more quickly than I anticipated. EUR/USD’s inability to build on gains above 1.2700 despite extreme short market positioning, highlights the lack of confidence in resolving the crisis. EUR/USD appears to be increasingly following the moves in peripheral bond spreads and the news here is not good either especially in Spain, with spreads continuing to widen out.

The G20 communiqué offered no support to the EUR, with little by way of concrete measures while Germany continues to stick to its stance of no renegotiation of Greece’s bailout terms. The EU finance ministers summit in a couple of days time may provide some relief but only if concrete measures are outlined. In the meantime EUR/USD will continue to remain under pressure. As noted yesterday, I look for a test of EUR/USD 1.2515 which could happen as early as today.

Considering that the prospects of a further round of Bank Of England quantitative easing has grown as hinted at by BoE Governor King, GBP has shown some resilience. Indeed, it is not clear that GBP will weaken if and when the BoE expands its balance sheet again. My analysis reveals that the reaction of GBP has been mixed both to the announcement and implementation of asset purchases.

Inflation data will provide some clues to the room for further monetary stimulus while the minutes of the last MPC meeting two weeks ago will provide some inkling of the support within the Committee for fresh QE. CPI is likely edge higher but this will be due to seasonal factors, while the minutes will likely reveal two dissenters.

GBP meanwhile, will continue to track the EUR with the currency pair trading in a 0.80-0.81 range. EUR’s drop overnight has taken the wind out of GBP’s sails, but strong technical support will be found around GBP/USD 1.5601.

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Euro rallies on Greek election outcome but gains to be short lived

The Greek election outcome will be met with a sigh of relief across markets. However, there is still likely to be plenty of horse trading before a new government is formed and even then Greece’s fiscal/debt/growth problems will not just miraculously go away. Market pressure will resume after a brief delay.

At least for the early part of this week markets will likely find some support however, and with events including the FOMC meeting, G20 meeting and EU Summit coming up, hopes that some solutions may be forthcoming may at least prevent sentiment for risk assets from deteriorating too significantly.

The EUR garnered support following news that pro-bailout parties have gained sufficient votes to form a government in Greece. Negotiations will begin to form a coalition government between the first placed party New Democracy and third placed Pasok but the risk remains that prolonged discussions could quickly result in the EUR erasing its gains. Indeed, Pasok leaders are talking about the need to form a ‘government of national unity’, suggesting the process of forming a government will not be straightforward.

A slightly less negative shift in EUR sentiment has been apparent from the CFTC IMM data which revealed that net short positions dropped (ie there has been some short covering) even before the election outcome. The election result will encourage more short covering although data releases this week including the June German ZEW investor confidence and IFO business confidence surveys, both of which are set to decline, will caution against becoming overly bullish EUR. Short term EUR/USD resistance is seen around 1.2750 but a move back down to around 1.2515 is more likely as the week progresses.
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One of the reasons the EUR has managed to garner support over recent days has been growing speculation of Fed action to boost the economy in the wake of a rash of softer data releases. Such expectations have put the USD under pressure, with last week’s data revealing disappointing retail sales, industrial production and consumer confidence. On Wednesday the markets will find an answer to speculation of more Fed action, with the Fed FOMC policy decision.

Expectations of more quantitative easing will be disappointed but the Fed will likely increase Operation Twist buying time to evaluate incoming data releases. A combination of a relatively positive Greek election outcome together with speculation of more QE will keep the USD under pressure ahead of Wednesday’s outcome but weakness ought to prove short lived, with USD gains expected following the Fed decision not to expand its balance sheet further.

Central banks ready to act

Markets are in wait and see mode ahead of Greek elections with range trading likely to dominate market action, albeit with a slightly risk on bias. US data disappointed once again, with jobless claims coming in worse than expected, compounding the growing fears about deterioration in US job market conditions. Perversely the poor jobs data coming against the background of soft May CPI inflation data have fuelled expectations of Fed action at next week’s Federal Reserve FOMC meeting.

It is not only the Fed that markets believe may act, with reports overnight suggesting that there may be some form of coordinated action by central banks should the Greek election outcome prove to be unfavourable. On this front, the news appears to be a little more encouraging as expectations that pro bailout parties will garner relatively more votes has grown as reflected in the 10% rally in Greek shares overnight.

If it takes weak economic data for markets to rally nowadays then there will be plenty available today, with declines expected for the May Empire manufacturing survey and June Michigan confidence, while industrial production is only likely to register a marginal gain in May. While the data may add more fuel to the fire, I suspect it will still be insufficient to result in more Fed balance sheet expansion.

European Central Bank (ECB) President Draghi is scheduled to speak today but I doubt he will suggest a move towards another LTRO or Securities Market Purchases. On the subject of central banks the Bank of Japan will announce its policy decision today but I expect no change in stance despite the fact that the 1% inflation goal remains a long way off. Currencies will remain in ranges but hopes of central bank action and a favourable outcome to the Greek elections will provide support for risk currencies and keep the USD under pressure.

Calm start to the week

There will be some relief reverberating through markets at the news this weekend that Greek opinion polls show growing support for pro-bailout parties. While the Greek election is still some weeks off suggesting that uncertainty will not ease quickly this news will allay fears of a quick ‘Grexit”. The week will begin quietly, with holidays in the US, keeping market trading largely thin and within ranges.

However, there are plenty of data releases and events which will result in increased nervousness as the week goes on. Data this week will reveal further contrasts between the US and Eurozone, with sentiment gauges in the latter set to deteriorate further while consumer confidence in the former will improve. In turn, Eurozone asset underperformance including EUR weakness will remain in place.

The contrast in the outlook for the US and Eurozone has been reflected in a significant shift in speculative positioning. CFTC IMM data reveals an all time high in speculative US positioning but in contrast an all time low in EUR positioning. The USD is winning by being a less ugly currency than the EUR and for now the markets are content to ignore US problems. This is set to continue over coming weeks.

Key data and events this week include the Irish referendum on the fiscal pact on Thursday and the US May jobs report on Friday. Ahead of these there is some periphery supply, with Italy coming to the primary market today. Polls point to a ‘yes’ vote in the Irish referendum, perhaps unsurprising given the risks of losing access to funding if voters vote ‘no’.

In the US markets look for a 150k increase in payrolls though its worth noting that there are less clues this month given the early release date. This slow but steady improvement in jobs will not be particularly exciting but at the same time it will no do the USD much damage either.

Euro grinding lower as officials talk about Greek exit

The week begins in sour mood although notably Asian market pressure was limited even in the face of ongoing Eurozone tensions. China’s cut in its RRR over the weekend helped to limit the damage to markets but there are still plenty of negatives to chew on. Notably European officials are openly discussing and even preparing for the possibility of a Greek exit from the euro, an outcome that has grown in probability as fresh elections loom in Greece.

FX markets have finally awoken from their stupor, with a spike in volatility and moves out of long worn ranges registered. The USD has extended its upward trajectory that began in this cycle on 27th April. The rally looks strong and sustainable but is built largely on the fact that the USD looks less ugly than some other currencies rather than on positive US economic developments.

Admittedly US recovery is taking shape but the data is not sufficiently strong to erase expectations of further Fed quantitative easing, a factor that will limit the ability of the USD to capitalise on weakness elsewhere. Data over coming days will not help to provide much clarity on the issues, with April retail sales likely to be soft and the Fed FOMC minutes unlikely to deliver much new information. Even so, risk aversion is intensifying, providing the USD with firm support, suggesting that the USD will continue to edge higher over coming days.

The EUR in particular has sustained a drop below the psychologically important 1.30 level, spelling more downside risks. Greek politics and the potential for fresh elections remain at the forefront of attention. A small amount of relief on upcoming Greek bond redemptions following the EU’s deliverance of EUR 4.2 billion funds will not be sufficient to offset political worries.

EUR will also find direction from the Eurogroup meeting of finance ministers meeting today who aside from Greek issues will also discuss the Spanish banking sector. Meanwhile, a meeting between French President and Hollande and Germany’s Chancellor Merkel will have the potential to move markets but the chances of a breakthrough on any fresh deal is limited.

Data releases will confirm Eurozone recession while the May German ZEW investor confidence survey is set to record a decline. All of this will not bode well for the EUR, with the currency set to grind lower over coming sessions. EUR/USD 1.2852 will be a crucial support level, a break of which will see EUR slide much further.

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