Investors are now viewing a Greek exit as increasingly likely..

andres del risco

Investors are now viewing a Greek exit as increasingly likely. With political dynamics shifting, a new Greek Government will have to interact with left wing parties that will call for a renegotiation of Greek terms with the Troika. I see a breakdown in said negotiations leaving Greece cut off from funding and thus, in all likelihood, result in a break from the single currency and usher in a new national currency in Greece. Far-fetched? Perhaps. Although it is becoming a distinct possibility. If off sailing or island hopping in Greece this summer take plenty of cash with you as you may be stuck in the middle of the transition to a new currency.

A Greek exit would be viewed by the markets as a negative. We could see a sharp decline in the EUR over the next couple of months and I expect markets and all asset classes to be volatile. If this scenario plays out we could see EUR/USD around the 1.25 level by end of June.

EUR/USD traded in the low 1.28s in the overnight session however there’s been a bounce this morning back to circa 1.2850 level on the back of better than expected GDP data out of the EMU with the (QoQ) (Q1) and (YoY) (Q1) coming in flat against expectations of -0.2%. The German ZEW survey – Economic Sentiment (May) came in under expectations with the current situation (May) posting a better than expected figure of 44.1 against 38.0.

So where now for EUR/USD? I still see the trend as downwards however as I alluded to yesterday we may see a push back up to the 1.29 figure in intraday trading. The driver for today on the pair, along with the usual rumour/counter rumour on Greece, will be data releases out of the US this afternoon. Will we see Dollar strength or weakness? We have the CPI figure out at 13.30 along with Retail sales that will provide volatility on the pair. If you’re a seller of EUR and buyer of USD I’d look to work a market order around 13.30 to take advantage of any deterioration in the US figures. Any rally on the pair will be short lived and I don’t see a break higher with further downside pressure likely. Target level for end of week? We’ll see a break through the 1.28 level and into the 1.27s.

GBP/EUR? After it’s sprint upwards the past few weeks, it took a couple of days rest, a few sips of Lucozade, and it seems it’s got its second wind. We smashed through the 1.25 level yesterday on EUR weakness with comments from European officials worrying markets and we saw a broad sell off. From the doldrums of last year it seems Sterling has finally decided to break free from the monotonous range bound trading. It helps it’s now seen as the haven of choice. Will this continue? I see no reason why not. Is the UK economy in great shape? Of course not. However, compared with our European neighbours we’re in rude health. (Perhaps a slight exaggeration!)

If you’re a buyer of EUR look to ‘average up’ your exposure covering off at various levels. If you think it’s going higher (as I do) great. However, as you are all too aware by now GBP has a tendency to fall quicker than it rises. Look to cover off some on a ‘Spot’ basis whilst working Market orders to take advantage of any spikes intraday or an ‘OCO’ to protect your downside risk whilst maximising your upside potential. Please contact me to discuss these options.

GBP/USD? As I mentioned last week I see range bound trading on this pair continuing between the 1.6050 level and 1.62. Nothing too exciting happening at the moment on Cable. If you’re a buyer of USD anything above 1.60 the past few years has been viewed as a good level to purchase at. As I’ve said before, I think the fundamentals in the US will improve and I expect USD strength in Q3 so we’ll see GBP/USD push well under the 1.60 figure. We were at 1.52 on this pair not so long ago!

We’ve had a lot of news out this morning including the UK trade balance that narrowed by £26M to £-8.564B instead of the expected £-8.400B so we saw cable retrace from the 1.61 level by around 30 pips. As one commentator put it this morning “So much going on, so little movement”. Markets have been relatively flat this morning so here’s hoping we get some movement in the US session. I’m sure we will.

Tomorrow is a big day in terms of data with the claimant count, average earnings, unemployment rate out of the UK followed by CPI and trade balance out of the UK. The main event following the aforementioned is the release of the Bank of England Quarterly Inflation report at 10.30am.

Look to work orders around these key events as you can improve your rate of exchange quite dramatically. We’ll work with you to mitigate your risk whilst taking advantage of the upside.

Written by Liam Alexander, Axia Fx

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