Analysis / Daily / Finance / forex

Greek woes dominate market sentiment

One Pound

May’s UK CPI figures headline the economic calendar in European trading hours. The core year-on-year inflation rate is expected to rise to 1 percent, rebounding from the 14-year low recorded in the prior month and snapping a three-month deceleration streak. Leading surveys appear to support the case for an improvement. UK news-flow has tended to disappoint relative to consensus forecasts over recent months however, warning of the plausible probability of a downside surprise. Such an outcome may underscore the disparity between the BOE’s apparent nod toward a mid-2016 rate hike telegraphed in the central bank’s latest Inflation Report and the markets’ priced-in bets for tightening by the first quarter. The British Pound may face selling pressure in such a scenario, although follow-through may be limited as traders wait for the release of minutes from June’s MPC meeting before showing directional commitment.

euro

The single currency swung wildly on Monday despite euro’s gap-down open and then weakness to 1.1189 ahead of European open due the deadlock between Greece and its international creditors after weekend talks, euro ratcheted higher on short-covering and rose an intra-day high of 1.1295 due to dollar’s broad-based weakness partly due to the release of weaker than expected U.S. industrial output in May. Sunday’s talks between Greece and its international creditors broke up after less than an hour. German Merkel ally and top CDU official Kloeckner said ‘Greece is gambling too far and patience is running out.’ ECB’s Draghi said ‘ECB fulfills its mandate as central bank towards Greece; ECB will continue to take decisions on monetary policy on bank supervision in full independence; central bank liquidity to Greek banks amounts to around 118 billion euros; current liquidity support is around 66% of Greece GDP; liquidity will be extended as long as Greek banks solvent on with sufficient collateral.

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The dollar was steady in early Asian trade this morning, with traders adopting a cautious stance as they wait for the outcome of the U.S. Federal Reserve’s two-day policy meeting that takes place amid the backdrop of a looming crisis in Greece. A bright employment report last month as well as an uptick in wage inflation have heightened speculation that the Fed may begin raising interest rates as early as September. That has kept investors abuzz as they look to policy clues from Fed Chair Janet Yellen’s post-meeting news conference on Wednesday. However, a hawkish policy statement is far from a given. U.S. data overnight showed that industrial production unexpectedly fell in May as manufacturing and mining activity remained weak, a sign that a strong dollar continued to constrain economic growth.

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