GBP/EUR 1.3574 (0.7365)
There is only one place where we can start the commentary this morning and that is with Greece, where talks in Brussels between officials from the 19 euro-area countries concluded late on Friday. The 10 days of negotiation felt more like a game of chicken, where both parties were waiting for the other to blink. Unfortunately for Tsipras and his new leftist-led government they found themselves without a single firm ally among their 18 Eurozone peers and were first to give way and now look likely to concede to many of the previous bailout conditions.
Today Tsipras’s government will submit a list of economic measures it will undertake and the finance chiefs will then decide whether his proposals go far enough. Under the deal, it looks like Greece will continue to live under the EU/IMF bailout which he had pledged to scrap, and must negotiate a new program by early summer. In the game of chicken it is usually the party with the most to lose that flinches first and it was very much the case here. Greece’s banking system would have faced the prospect of an almost imminent collapse while also crashing out of the euro. This agreement removes this immediate threat for Greece, but it feels like yet again the can is just being kicked a little further down the road.
It is clear to see that the previous conditions under the original bailout program have failed to spur the Greek economy. Since its first international bailout in 2010, Greece has seen its economy shrink by about a quarter and has the highest unemployment rate in the euro region. It was understandable then why Tsipras felt hard done by under the previous terms but with anti-austerity parties knocking on the door of other bailout countries, it was always going to be a tall order. One may be forgiven here for feeling a little sorry for the Greek’s after all that has happened in the past month, as they find themselves in relatively the same position. The outcome may also prove politically bruising for Tsipras after he was forced to ditch plans to take back control of Greece’s struggling finances so he could raise wages and pensions. He delivered an upbeat message to his country stating “Greece achieved an important negotiating success in Europe.”
Leaving aside the above much discussed topic, what else is in store this week for FX markets? In our view we expect US Fed Chair Yellen’s semi annual testimony to Congress on Tuesday and Wednesday to be this week’s focus. As was highlighted in last week’s FOMC minutes, several committee members now feel the US is no longer immune to global deflationary pressures and expressed concerns over downside risks to inflation. Such comments have since dampened previous expectations of a June 2015 first interest rate hike. Yellen’s testimony is likely to give some further colour and clarity as to the Feds latest thoughts, so will be closely watched.
On the data front, we also have some interesting key figures out from the US too. Firstly on Thursday, markets expect year on year inflation to remain unchanged at 1.6%. With the above comments in mind, the risk surely now is for a miss to the downside. Next up on Friday, we get the second estimate of Q4 GDP to revise growth lower to 2.0% from the previous advanced estimate of 2.6%.
Staying on the data stories, we also have a busy week for Europe too both from the eurozone and UK. Tomorrow we expect eurozone core CPI to post an unchanged annualised figure of 0.6% (non core to show a fall of 0.6%). However with the pending ECB QE to kick off in March, the single currency will be less sensitive than normal to inflation data. Of note on Thursday, markets are forecasting UK GDP q/q to remain unchanged at 0.5% (yoy 2.7%) but with the risk of a better than expected GDP readings due to recent strong production and income data.