GBP/EUR 1.3809 (0.7243)
Unless you have been stuck on a desert island with a volleyball called Wilson you should be aware that this week is a pinnacle week for Greece and global market risk. We’ve been here before I hear you say, and you’re right, but the failure of both sides to come to a firm conclusion on this Greek drama means that we will likely be here once again, unless the worst case is realised and Greece leave the Eurozone. The can, at this stage, has been well and truly kicked and like German patience its aluminium cover is wearing thin. Last week’s walk out by the IMF was a further signal to Greek leaders that their creditors are not here to play games. While Greek Government rhetoric continues to say they are close to a deal, IMF/ECB/EU leaders comments suggest otherwise. Greek Finance Minister Varoufakis continues with his “Game Theory” approach, he believes that Greece is too systematically important to the Eurozone, perhaps not from a contribution standpoint but for the fact that a Grexit would signify a failure of the single currency union (in his view). The fact is, this is not a game. The future of Greece lies in its leaders hands and while many believe the drama has turned into a comedy, the end result could be a horror story.
Yesterday’s showdown in Brussels yielded little results. Whatever proposals Greece have brought to the tables have not been enough to satisfy its creditors, one area Greece appear to be resolute about not changing is pension reforms, they refuse to allow further cuts to be made, whereas is it apparent that creditors just do not see any progress being made with these cuts to pensions. There does still appear to be some amount of complacency in markets, perhaps because no one really can calculate what sort of impact a Grexit will have. Short term and long term implications are likely to be very different, and for a market looking to manage risk, range bound trading and consolidation is the best option. The single currency still remains relatively supported, however the longer this drags on the lower the single currency is likely to fall. Needless to say Greece is likely to dominate market activity this week, meaning overall risk trends will be key to currency movements. Any move higher in EURUSD will likely find selling pressure between 1.1350/ 1.1400, while 1.1050 should hold movements to the downside unless we see an all-out Greek rout.
GBP was one of the stronger performers last week, data from the UK continues to be on the strong side (for the most part), last week we saw a stronger set of trade balance figures, far stronger industrial production data, a pick-up in NIESR GDP estimates and improved construction output. GBP advanced some 2.3% and 2.5% against USD and EUR respectively. The lack of mention of monetary policy in Chancellor Osbourne’s and Mark Carney’s Mansion House speech if anything, proved positive for GBP. Key to the pound’s outlook this week will be tomorrow’s release of CPI inflation data. Year on year inflation is expected to have risen to .1% from -.1%, this will confirm the BOE’s view that the drop in inflation was temporary and the reading would rise towards target throughout the rest of the year. Should this be confirmed we may well see interest rate expectations for the UK rise, and with that we would expect to see further GBP strength throughout the year. For today there is little major data and GBP movements will likely be dictated by counter currency flow. EURGBP has support just above .7200 with resistance to the topside side at .7260, a break below .7200 opens a drop towards .7150 area. GBPUSD remain in the top end of its June range, resistance to a move higher comes in just below 1.5600, while a break back below 1.5435 area will likely see further declines.
The outlook for the USD is all about rate hike expectations. It is the primary focus for USD and while the greenback may benefit from some risk aversion, dominant USD strength will only come once the market has confirmed the Feds intention to hike rates. We see the only real opportunity for the Fed to hike rates as coming in September, it is the last meeting with a scheduled press conference after it, the next is not until December and a rate hike in this December trading is improbable. This leaves all focus on US data throughout summer, for now data continues to point to a mixed pace recovery and certainly not supportive of any aggressive rate hikes but the Fed have been resolute that hikes will be gradual and limited, we may well see a token hike in September, perhaps .15%, to allow the Fed to set the tone for markets into 2016, without disrupting the apple cart too much. Manufacturing and Industrial Production data top today’s calendar, both are set to have improved through May and could well see the Greenback face support into the afternoon session.