Market News & Insights
12 February 2015

Greece and the Well Kicked Can

EUR/USD 1.1338
GBP/USD 1.5246
GBP/EUR 1.3446 (0.7440)
EUR/CHF 1.0542
GBP/CHF 1.4173
GBP/AUD 1.9863

We are now through hump day but there still remains a significant barrier between EU Finance Ministers and the new anti-austerity Greek government after yesterday’s extraordinary meeting once again ended in deadlock. “…we can’t even agree to disagree” was a phrase quoted by my colleague in Tuesday’s commentary and that still appears to be the case. There is another meeting scheduled for Monday 16th and we’ll likely see plenty of additional meetings as long as both sides fail to find common ground, we discussed “kicking the can down the road” yesterday, it’s a tactic we have seen used in the past, especially when it comes to Greece, I was reading back through some old commentaries yesterday and it was always felt the Greek issue would rear its head again, it probably took a little longer than many expected but just like the terminator, Greece is back and causing trouble. Barclays have commented this morning that they now believe a Greek exit to be at its highest probability since 2012, European stocks continue to struggle as risk ebbs and flows on headline news (or lack thereof), while the EUR remains range bound between 1.1270 and 1.1360 so far this week.

The Riksbank in Sweden has become the next major central bank to introduce negative deposit rates, rates they charge their banks to hold SEK, they have also announced a QE program, up to SEK 10 bn, with more if necessary. They join the growing number of world central banks adopting ultra loose monetary policy with almost all major central banks, with the exception of the Fed and BOE maintaining, adapting a policy to combat low global growth concerns. It is also notable that the huge scale of the ECB’s QE program has forced many of the single currency regions neighbours and trading partners to adapt as they are weary of their own currencies appreciating too much against the weakening EUR. We have seen Denmark, Sweden and Switzerland all adopt negative interest rates thus far this year. `While currency wars is great for grabbing headlines, there certainly appears to be a currency scuffle, whether war breaks out remains to be seen but Greek negotiations will likely play their part.

GBP pushed to fresh 7 year highs against the EUR as the pound rallied through yesterday’s session. Data has really continued to play second fiddle to larger geopolitical risk this week but all eyes will be on this morning’s release of the BOE Quarterly inflation report. Our regular readers will know the GBP strength has been closely tied to its interest rate outlook, especially when we look at GBPUSD declines. In June last year there was talks of 2014 BOE rates hikes, now markets are pricing in the first interest rate increase in q1 2016. The massive change has come as UK inflation has dropped from the BOE’s 2% target, to below 1% (.5%), causing the BOE governor to write a letter to the chancellor to explain. Now deflationary pressures from Europe and declining energy costs have all played there part in the negative outlook on UK inflation but today we should get a clearer picture of the BOE’s stance on this. Any indication they are relatively upbeat or comfortable with inflation, or upward revisions to the inflation outlook, should see GBP pairs rally higher. Should we see these growth and inflation outlooks revised lower, GBP could well face additional selling.

This leaves GBP pairs at a significant crossroads. The stronger GBP in recent weeks as seen EURGBP fall to fresh seven year lows, while GBPUSD appears to have bottomed out after declining close to 13% from last July. A more positive tone from the BOE should see further EURGBP downside, while GBPUSD has broken its bear trend and is looking for a reason to accelerate back towards 1.5500. With wage growth inflation figures improving considerably in recent months, an upbeat report may not be as surprising as some analysts are predicting.