Greek opinion polls give the market some hope
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 is trading up above €1.25 this afternoon, 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.
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