Foreign Exchange News
20 July 2015

Greek Banks Re-Open, EUR Remains Vulnerable

EUR/USD 1.0860
GBP/USD 1.5598
GBP/EUR 1.4361 (0.6960)
EUR/CHF 1.0437
GBP/CHF 1.4985
GBP/AUD 2.1100

Friday’s trading session saw the Greece relief rally give up some steam as equity markets sold off, giving back some of the week’s gains. Commodities remain under pressure with gold prices falling to 5 year lows, while other base metals are following suit and facing selling pressures. The USD was once again an outperformer into the Friday evening close, the USD Index rallied to a two month high on expectations the US Fed will look to raise interest rates this year. The EUR continued to find itself under pressure, the larger fundamental picture weighing on the single currency, especially as its two closest trading partners (USD and GBP) have both been rallying on raising interest rate expectations. Greek banks are expected to open today for the first time in almost three weeks, restrictions and capital controls will remain in place however, withdrawals limited to €420 per week (versus €60 per day) . In overnight trading better than expected Chinese data supported riskier assets, the USD dropped back from Friday’s high close, while the AUD rallied back from six year lows against the USD.

Greek discussions will continue and the general feeling across markets is that the current package will lead to further troubles for Greece, Greece still carries the risk that it may have to leave the Euro area. The fallout from the last 5/6 months however may take longer to heel, there are certainly mixed opinions across Europe about providing Greece with further aid, but it appears many feel that without some serious debt restructuring or a write off, that it is only a matter of time before Greece is back in the headlines once again. Greek PM Tspiras will likely look to have a flash election in the next few months, given the fallout from his succumbing to creditor’s pressure. Greece is scheduled to make a €6.8 bln payment to creditors today, and that is expected to be made.

The pound was a notable outperformer last week following comments from Governor Carney suggesting interest rate hikes are approaching, we should get a little more colour on this front with the BOE minutes for the June meeting due for release this Wednesday, any indication of a shift in MPC voting may well see UK rate hike expectations brought forward. We take these comments with an air of caution, it was this time last year that BOE members, including Governor Carney, was suggesting surprise that markets were not pricing in year-end rate hikes. Needless to say the UK outlook deteriorated and with that the chance of any UK rate hikes diminished and sent GBP into a tailspin. The UK is certainly in a better position to absorb such hikes this time round and it looks to be a head to head vs the Fed on who will raise rates first. For now the US look to be ahead in that race but should the BOE continue with these hawkish comments, there may be space for GBP to advance further.

There is very little in terms of data or Fed speak from the US until Wednesday and this will likely leave the USD open to larger risk trends. USD strength continues to be based on the expectation of rate increases in the US, however with markets now looking towards September for the first hike, I can’t help feel they are running out of time for data to shape up to support that view. As it stands data certainly isn’t strong enough, we’ll need almost two months of solid US figures to turn that around but for now USD bulls are in control based on expectation of hikes, this can turn very quickly.

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