Market News & Insights
17 February 2015

Deadlock Dumps the Euro

EUR/USD 1.1377
GBP/USD 1.5364
GBP/EUR 1.3499 (0.7405)
EUR/CHF 1.0613
GBP/CHF 1.4330
GBP/AUD 1.9695

The US was on holiday for Presidents Day yesterday so markets had a nervous day waiting for the Eurogroup’s meeting with Greek leaders to discuss Greek debt. Through much of the day markets traded higher on a mix of hope/anticipation a favourable resolution for both parties would be found. No sooner had the meeting started that it became evident that common ground we discussed yesterday, could not be found and no progress was made on discussions. The EUR which had traded firmly through the day plummeted, European stocks traded higher through yesterday but have opened this morning firmly in the red. In overnight markets stocks traded mostly higher with the exception of the Nikkei, safe haven demand has supported the JPY and USD, while the AUD traded higher following the RBA minutes, which showed the RBA opted to cut rates in Feb over March in order to outline its actions in its Statement on Monetary Policy due a few days after their Feb meeting.

While there still appears to be some hope that a resolution will be found on Greek debt negotiations it is difficult to see at this current stage how exactly this will occur. Greek leaders have continued to stick by their guns and refuse to ask for an extension of their current aid program (which would involve additional conditions), they are looking for an unconditional four month extension, with the bigger picture focusing on cutting the Greek debt obligations. The European leaders and ECB appear unwilling to shift their stance on this and while we have seen plenty of accommodative wording from officials the Greek stance has remained resolute. There is plenty of posturing going on, EU leaders cannot be seen to lose face in this standoff but neither can the new Greek ruling party. As it stands Greece continues to receive Emergency Liquidity Assistance (ELA) from the ECB, however if negotiations remain at a deadlock after the end of this week Greece may well find its access to funding removed, causing all sorts of issues with potential capital controls put in place to prevent capital flight from Greece. Needless to say should the latter occur there will be significant further downside to the EUR. Watch this space.

The economic calendar has plenty of action this morning most notably from the UK, with the release of the CPI inflation reading. GBP had traded firmer over the last week following upwards revisions to growth and inflation outlooks further down the curve but in the near term Mark Carney warned we may well see inflation fall as low as 0%. This puts this morning’s CPI reading firmly in the headlights with the year on year inflation reading expected to drop to .4% (down -.8% through January).After last week’s inflation report we would expected a weaker reading in CPI, however the BOE appear unperturbed on this front attributing the downside pressure in inflation to lower fuel and food prices so our focus today will be on the core CPI reading, that excludes more volatile items in price. This is expected to rise for the second consecutive month to 1.4%, anything on par or above will be deemed as positive and could bolster UK rate hike expectations for this year, which should see further GBP demand. Needless to say declines in the core reading may indicate larger price pressures than the BOE have discussed, which would be negative for GBP crosses.

The USD index traded relatively flat on the day following a .7% decline last week and with little in the way of major US releases we may well see USD direction dictated by larger risk appetite. With that in mind Greek debt negotiations will be key, as will details on the Ukrainian ceasefire which also appears to be on shaky ground with combat apparently continuing on the ground.