Greek parliament votes on austerity measures to pave way for bailout - Business Works
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Greek parliament votes on austerity measures to pave way for bailout

Richard Driver of Caxton FX Greece is, unfortunately, in a state of utter turmoil; riots, 21% unemployment, recession and political division. However, as far as the markets are concerned the weekend’s events represent a step in the right direction. The Greek parliament passed an austerity package necessary to receive its second bailout in two years. With this major obstacle removed, global stocks are on the up and the euro is trading positively.

The euro is by no means rallying however. There are potential banana skins for Greece to slip up on between now and Wednesday’s (February 15th) meeting between EU finance ministers. We still need to see a deal on a debt swap between Greece and its private sector creditors, we still need to see some further budget cuts (€325 million’s worth), and the Troika will still want to see evidence of how Greece will implement its austerity promises.

The euro should be able to climb if Greece’s bailout is finally remitted on Wednesday, such are the market’s fears of a failure to do so. However, with the eurozone heading into recession and debt issues elsewhere in the periphery waiting in the wings, this period of improved sentiment towards the euro should be nearing its end.

ECB and BoE hold interest rates, though the latter adds £50bn in QE

The European Central Bank and Bank of England both decided to leave their interest rates on hold at 1.00% and 0.50% respectively. Neither decision comes as much of a surprise, though ECB President Mario Draghi’s press conference has led us to revise our expectations of another eurozone rate cut. The ECB seem content with their ‘'QE through the back door'; a second round of cheap ECB loans is scheduled for the end of this month, which should continue to benefit eurozone liquidity and particularly bond market pressures. As a result, we don’t see the ECB cutting interest rates for the foreseeable future.

The Bank of England went with market expectations and added a further £50bn to their quantitative easing programme. The move was fully priced in and did not/does not pose much of a threat to the pound.

Further room for hope in the UK

In addition to January’s broadly positive UK growth figures (particularly from the services sector), we saw some strong industrial and manufacturing production figures last week, as well as an excellent trade balance showing. However, the week ahead provides plenty of scope for sentiment to worsen against sterling. Wednesday brings some UK unemployment figures and Friday brings the monthly update from UK retail sector (which is expected to show a contraction). As ever, external events (namely developments in Greece) should prove far more market-moving.

End of week forecast
GBP / EUR 1.19
GBP / USD 1.59
EUR / USD 1.3375
GBP / AUD 1.4650

Sterling is trading at the now familiar level of €1.19 (84p) and seems reluctant to budge at present. The short-term risks this week are skewed to the downside for GBP / EUR but beyond this, we are still targeting levels above €1.20. Against the US dollar, the picture is a little brighter (judging by the last three months). GBP / USD is currently trading at $1.58 and a short-term climb in EUR / USD looks likely to drag this pair by a cent or so higher in coming sessions. This is based on a fairly optimistic view of Greek progress this week. The risks of another twist or two from Greece are significant however and if a second bailout is not remitted, then the US dollar will be a major beneficiary.

Richard Driver is a Currency Market Analyst with Caxton FX and can be contacted via:

This brief is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

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