Analysis / Daily / Finance / forex

Europe Moves to Restore Funding to Greece

One Pound
Sterling hit a 7-1/2-year high against a trade-weighted basket of currencies yesterday as traders bet the Bank of England would raise interest rates early next year, while euro zone monetary policy remains ultra-loose. That diverging outlook was crystallised this week, with Bank of England Governor Mark Carney saying a first rise in interest rates since the 2008 financial crash was “moving closer”, and U.S. Federal Reserve Chair Janet Yellen reiterating that a rate hike was on the cards this year. Carney, who also played down the impact of a strengthening pound on inflation, helped pull money-market pricing for a UK hike in to the first quarter of next year. Such a move had not previously been expected until May or later. Carney’s comments earlier in the week followed an uncharacteristically hawkish message from BoE monetary policy committee (MPC) member David Miles, who said the idea the BoE had to wait for the Fed to raise rates was “daft”. But some strategists reckon that whatever is said in public, the BoE will not risk tightening policy, and potentially stifling growth, before U.S. rates have started to increase.

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The euro has tipped higher against the U.S. dollar on Friday, easing off the previous session’s one-and-a-half month trough after Greece received a €7 billion bridging loan from the euro zone. EUR/USD hit 1.0903 during late Asian trade, the session high; the pair subsequently consolidated at 1.0889, easing up 0.12%. The pair was likely to find support at 1.0853, Thursday’s low and a one-a-half month low and resistance at 1.0963, Thursday’s high. The single currency found some support after euro zone ministers agreed on Thursday to give Greece a €7 billion bridging loan from a European Union-wide fund to keep its finances afloat until a bailout is approved. The loan was expected to be confirmed on Friday by all EU member states. The news came after the European Central Bank increased its emergency lending to Greek banks by €900 million and added that it is operating under the assumption that Greece will remain in the euro zone. ECB President Mario Draghi said on Thursday that several positive things have happened to allow the increase in emergency liquidly assistance and that it now appeared that Greece would make the repayment and clear its arrears to the International Monetary Fund.

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The dollar has edged away from two-month highs against a basket of major currencies but is till on track for a solid weekly gain as the market shifted its focus to an eventual hike in U.S. interest rates. he dollar index was up about 1.5 percent in a week in which Federal Reserve Chair Janet Yellen reiterated that the U.S. central bank would likely lift interest rates later in the year. The dollar index stood at 97.496, down about 0.2 percent after having risen as far as 97.756 in the previous session. A break above 97.775 would take the index back to highs last seen in April. The greenback was down about 0.1 percent on the day against the yen after touching a one-month peak of 124.235 yen, still on track to gain more than 1 percent for the week. U.S. economic data was mixed on Thursday. The number of Americans filing new applications for unemployment benefits fell more than expected last week, but factory activity in the U.S. mid-Atlantic region grew at a slower pace than anticipated. June U.S. inflation data is due later today.

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