Greek opinion polls give the market some hope - Business Works
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Greek opinion polls give the market some hope

Richard Driver of Caxton FX The euro was given some relief in early Monday trading by the positive news that in Greece, the conservative and pro-austerity party - New Democracy – has edged ahead of the anti-bailout party Syriza in the opinion polls. If New Democracy can hang on to their lead and re-establish a pro-bailout, pro-austerity and pro-euro coalition, then fears of a Greek exit should subside. Judging by the euro’s brief and fairly minor bounce since the weekend though, the market remains understandably cautious.

Concerns over Spain are also growing, as the country’s ten year bond yields climb towards 6.50%, bringing into view the dangerous 7.0% benchmark which forced other peripheral nations, like Portugal and Greece, into requesting bailouts. Spain’s fourth-largest lender Bankia requires a bailout and the Spanish region of Catalonia is also in need of help to refinance its debt. Consequently, the risks of a Spanish sovereign bailout are increasing, which would create a huge amount of stress on the EU’s aid resources, as well as raising major question marks over Italy.

In addition to these mounting Spanish concerns, growth data from the eurozone was all pointing the wrong way last week. Figures from the German, French and eurozone-wide services and manufacturing sectors almost all disappointed, suggesting that the eurozone’s avoidance of economic contraction in Q1 will prove temporary.

With respect to the issue of Eurobonds, Germany doesn’t look like it will budge. What’s more, Austria, the Netherlands and Sweden have joined Germany in expressing their opposition to the idea of common eurozone bonds, so market hopes for a silver bullet have once again been quashed.

US GDP figure should confirm slowdown

This week brings two important growth figures from the US, in the form of the revised GDP estimate for the first quarter of 2012 (due on Thursday). The figure is expected to be revised down from 2.2% to 1.9%, well off Q4 2011’s impressive quarterly reading of 3.0%. Friday brings the monthly update from the US labour market and improvements in this area are expected to be moderate at best.

The US dollar’s safe haven status has very much come to the fore in the past month. Clearly ongoing softness in US figures keeps QE3 on the table as far as the Fed is concerned but we see safe-haven demand helping it appreciate further across the board. In particular, we foresee heavy losses for EUR / USD in the second half of this year, which will inevitably drive GBP / USD lower too.

End of week forecast
GBP / EUR 1.26
GBP / USD 1.5750
EUR / USD 1.25
GBP / AUD 1.6050

Sterling has been trading up above €1.25, with the positivity surrounding the Greek opinion polls already having dissipated. Sterling weathered some awful data last week, including a downward revision to the UK’s Q1 GDP figure to -0.3% and a steep drop in the domestic inflation rate. However, sterling’s safe-haven status still looks likely to push it even higher against the euro.

In contrast, sterling is always going to be under pressure against the US dollar. It should benefit from a minor short-covering bounce soon, though a return anywhere close to $1.60 looks a stretch now. Risk appetite away from the US dollar is likely to be hard-pushed to return in force ahead of the June 17th Greek elections.

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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