GBP/EUR 1.4316 (0.6984)
The Euro continues to struggle even though Greek parliament passed a package of measures as part of their bailout agreement. The single currency is beginning to struggle, particularly against currencies who’s central banks are going the opposite direction to the ECB, most notably the Fed and BOE. In the last 48 hours we have seen the Fed’s Janet Yellen reaffirm their stance that should conditions be met there will likely be rate hikes in 2015, while on Tuesday the BOE’s Governor Carney voiced his view that the UK are getting ever closer to hiking rates – both perceived as hawkish stances from the market. As of this morning GBPEUR has driven above 1.4300 and to levels not seen since November 2007, while EURUSD is testing the downside once again having held below 1.1000 with May lows towards 1.0800 now the target. Risk appetite was rather mixed yesterday, in Europe, stocks treaded water around recent highs as all eyes watched the Greek parliament while US stocks posted modest losses. In overnight markets moderate gains were seen while the USD was also an outperformer, with commodity dollars (NZD, CAD and AUD) all bearing the brunt of the losses against the greenback in the last 24 hours.
The EUR also struggled despite steps being made towards agreement, it is clear many parties are not happy with how this Greek “rescue” is playing out. I use the term “rescue” very loosely and we may well still see a Grexit as the debate wrangles on, under the current laid out conditions we are sure to be in this position once again, it may well be a year down the road but Greek levels of debt remain completely unserviceable. Greek PM Tsipras has faced consternation and anger from his own Syriza party, while even the IMF has come out to criticise the overly stringent and punitive deal, I just heard a good comment to sum up the situation “Greece has not been saved, they’ve been kept on life support”. The ECB Meeting will be in focus this afternoon but no change to interest rates or policy is expected. Much of the press conference is likely to be focused on Greece and the top of most people’s questions will be will Greece receive an extension to the ELA (Emergency Liquidity Assistance) or some form of bridge financing to reopen banks while the new program is implemented.
The USD took its lead from hawkish comments from Janet Yellen as well as some stronger than expected wholesale inflation figures. The comments from Janet Yellen were nothing new, the economic outlook echoed June’s beige book release while her comments were in line with the June FOMC meeting and minutes. What they are saying is, that should the economy grow as they expect, and should external issues not impact the US recovery, then the Fed may look to raise rates in 2015. All eyes are on September’s meeting with expectations for the first hike to come then, but while China remains an issue and as Greek negotiations continue, I struggle to find any rationale for the US to hike rates, especially when it can put their recovery as risk, not least via an overly strong USD which has already caused issues for US businesses in 2015. I am not doubting the Fed’s next step will be to raise rates, higher interests rates are coming, just with a little under two months to the September meeting, the US still remains some way from meeting correct conditions for a rate hike.
The pound has been plugging away in the background this week despite some weaker data points, CPI inflation was lower than expected, unemployment ticked up to 5.6% from 5.5% while wage growth advanced at 3.2% vs 3.3% expected. Despite these misses the pound’s strength is being driven by interest rate expectations and these have been boosted by Carney’s comments this week. Despite the data missing to the low side of expectations it continues to remain relatively robust, especially when comparisons are run versus the Eurozone and in some cases even the US where data remains mixed. Be warned however, Carney played the exact same game this time last year, where rate hike talk dominated much of Q3 before expectations were dramatically reversed. If anything Carneys comments act as a reminder to markets and the street that low interest rates are not here to stay forever, and in the UK, like the US, the BOE’s next step will likely be raising rates and beginning policy normalisation – the big question is when?