Market News & Insights
18 February 2015

Drama or Tragedy? – It’s still a Greek Play

EUR/USD 1.1400
GBP/USD 1.5420
GBP/EUR 1.3490 (0.7404)
EUR/CHF 1.0690
GBP/CHF 1.4456
GBP/AUD 1.9737

There is certainly a lot of white noise in markets as “people with knowledge of the situation” and “Unconfirmed sources” add their two cents to the ongoing Greek discussions. Not an hour goes by that some headline doesn’t flash across the screens, before we see a EUR reaction which inevitably reverses itself when the next rumour comes out. To cut through the hyperbole we tend to simply look at the comments coming directly from the people involved, and comments from the Greeks appear to be the most resolute, in that they will not ask for an extension if there are additional terms involved, recent news sources have suggested that Greece may seek an extension under certain stipulations, this has been mentioned by them in the past with specific reference to a four month extension (this was rejected in Monday’s meeting by the Eurogroup) but again we have yet to see anything official, headlines this morning suggesting this will be submitted today.

Meanwhile an ECB source commented that access to the ELA liquidity program would not just be suddenly removed, however there are some time constraints on this, this ELA facility is only meant to be limited with a cap of €65bln. This helped support the EUR through the early part of yesterday’s trading day but overall risk appetite remains on tenterhooks with EUR pairs in consolidation within recent ranges. In the shorter term as this continues, with some hope of a resolution, EURUSD looks more likely to trade back towards 1.1500 than back to Feb lows below 1.1300 but the longer this drags on, the closer Greece will get to losing access to emergency funding and the greater the chance of triggering Eurozone financial concerns. We feel it’s best to remain cautious on this front, hope is a wonderful thing but complacency can be a lot more dangerous when it comes to the EUR right now.

GBP consolidated as well through yesterday’s session, the headline CPI reading dropped to a record low of .3% year on year, bearing in mind Mark Carney has already said that inflation could drop as low as 0% we should expect the headline figure to drop further. Now many may assume this puts the probability of UK rate hikes on the back burner for the BOE but stripping out more volatile price components including fuel and food, core inflation actually rose, again adding to last week’s inflation report stating the BOE would expect inflation to return to target in their 2 year forecast target. Another key component to the rate hike debate comes in the form of labour market data today, unemployment is expected to remain at 5.8% in the three months through December, with wage growth at 1.7%. A better wage growth reading could well help GBPUSD extend its rally off 2015 lows, while the pound will be looking to test EUR and push EURGBP back below .7400.

Overall the USD still remains on a bullish trend, the USD index dropped .7% last week and has traded marginally firmer thus far this week but consolidation continues below recent 12 year highs. While we haven’t seen the shine totally removed from the USD, demand for the greenback has subsided. Interest rate futures and treasury yields are suggesting a rate hike is not priced in until September/October, while many economists/traders are suggesting the Fed will hike rates in June or July. I would be more inclined to side with the former here, we continue to see US data mixed and the Fed is playing a cautious game, neither committing to nor denying rate hikes are on the way. The wait and see approach appears to be favoured and no doubt the Fed will be including the global situation when making rate hike decisions. The IMF have already said the US alone cannot maintain global growth levels, what would be the impact if rates were raised too soon and too fast, in my view the Fed is unlikely to test this scenario. Similar to the BOE the Fed will likely raise rates cautiously, with increases limited when they do start.