Week Commencing Monday 13th July 2015

Overriding Market Themes

When will this Greece situation ever end? Soon, maybe! European leaders continue to thrash out the potential Greece debt deal, with all EZ members holding an overnight summit in Brussels on Sunday evening. It seems that the Greeks will be willing to accept a deal now, despite the creditors holding firm on a number of key “red lines”. Creditors are demanding that reforms are approved by the Greek government before the bailout terms can be negotiated, which are set to include ambitious reforms to both pensions and labour markets. They also want to have a presence in Athens, something which the Greek Prime Minister was extremely reluctant to do given the propensity of the IMF/Troika to medal. The deal is a bitter pill to swallow for Tsipras, especially given his historic referendum win last week. It is going to be tough for him to get this through parliament, however markets are starting to believe that he thinks the alternative is worse. Either way, Greece had two options, of which both meant the average Greek becomes considerably poorer. They have selected the lesser of two evils.

In other news, the IMF has cut its global growth forecast from 3.5 percent to 3.3 percent this year, reflecting continued European fears and a slowdown in China. More seriously for global growth however, the IMF dropped its growth forecast for the US economy to 2.5 percent from 3.1 percent. This has led to calls from Christine Lagarde for the US to push back its interest rate hiking path to early next year, however this appears to be a view not shared by Janet Yellen and the rest of the Federal Reserve. The IMF fears that a rate rise would trigger further gains in the value of the greenback, which would not only hurt US exporters but impact emerging markets using the USD as their settlement currency.

GBP this week

On the data front, UK CPI Inflation is the highlight of the week, despite the fact that it is expected to remain flat on the month. That said, wage growth is expected to accelerate further, potentially pushing to 3.2 percent on the quarter, amid ever declining unemployment (potentially dropping to 5.4 percent) and the June jobless claims dropping by circa 10k.

The Bank of England should have an interesting time dissecting last week’s all-Conservative budget. We believe that given the scale and aggressiveness of the Conservatives fiscal consolidation plans, we remain sceptical that rates can go north any time soon (we retain our view that interest rates will rise April next year). As such, GBP outperformance should start to moderate, especially as tight fiscal policy and institutional risks continue to weigh on UK economic growth prospects.

USD this week

Data-wise, Tuesday’s retail sales for June are the highlight. We expect the figure to come in below expectations at 0.2 percent on the month, while the core figure should increase by 0.3 percent on the month. Additionally, the University of Michigan Sentiment print should continue to point towards further increases in consumer confidence. Finally, Janet Yellen is scheduled to discuss monetary policy on Wednesday, with the rhetoric expect to continue highlighting the data-dependency of future interest rate decisions.

With the above in mind, we expect a continuation of the robust US Dollar, especially against the Euro. GBP/USD should remain reasonably locked in the 1.55 range, whereas EUR/USD could push further below the 1.10 level.

EUR this week

Thursday’s ECB meeting will likely now be the focal point of markets, perhaps with the exception of the Wednesday legislative deadline in Athens. In terms of data, we forecast euro area IP to edge up by 0.1 percent on the month while final June euro area HICP inflation should be confirmed at 0.2 percent.

In terms of direction, given the recent agreement we would expect to see some modest EUR appreciation and a decline in implied volatility. This relief rally will probably be short lived however, especially as FX markets quickly re-focus on the fundamentals which show considerably policy divergence between the UK, US and Europe. Expect GBP/EUR therefore to continue to push towards that 1.42 number.



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