Euro: first test (Greek) passed. The second – and last – will comprise the big four European leaders meeting today and the European Council summit on 28-29 June...…
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We have revised our expectations for the Bank of England’s next moves, after learning that in June four Board members out of nine voted in favour of expanding the APF. The dollar strengthened on the outcome of the FOMC, and the yen dropped as a result, re-entering the USD/JPY 80 area.
USD (nominal effective exchange rate) – The outcome of the FOMC was supportive for the dollar, which reversed on the upside, after declining since the beginning of the month. As well as from the Fed’s activism, the dollar also benefited from uncertainty over the euro area crisis. In case of negative developments on the latter front, the US currency should keep rising. Otherwise, it should simply consolidate the recovery achieved in recent days and manage to avoid dropping to new lows.
EUR – The euro reacted well on Monday to the outcome of the Greek elections, climbing from EUR/USD 1.25 to 1.27. It then stayed in this range throughout the week, tracing it back down during Thursday’s session. The lack of concrete developments from the Eurogroup, and mounting market expectations for an ECB interest rate cut, contributed to weakening the exchange rate. However, there is also a technical component to the movement. Following today’s Monti-Hollande-Merkel-Rajoy meeting, the last real test for EMU and the euro will be the European Council meeting on 28-29 June. Next week, market trends will be conditioned – or even distorted – by expectations ahead of this crucial event. If today’s meeting yields important developments, the euro could start the week on the rise, returning towards 1.26- 1.27. Otherwise, it would decline, to between 1.24 and 1.23. Resistances/supports to look out for ahead of a potential upside/downside acceleration are 1.2576-95/1.2461-41. Subsequently, in case of positive developments on the crisis front, the exchange rate could beat this week’s highs, testing 1.2800. In the opposite case, it could backtrack towards the 1st June low at 1.2288, with downside extending to 1.20.
GBP – Further important news from the UK economy, based on which we have revised our expectations for the Bank of England’s next moves, to embrace the forecast of a new expansive monetary policy intervention on occasion of the next meeting on 4-5 July, via an increase of the APF of between 325 and 375 billion pounds. This is because the minutes of the latest BoE meeting revealed that four out of nine Board members, including Governor Mervyn King, voted in favour of expanding the APF in June. This firm stance taken by the central bank is explained by: (1) easing upside risks to inflation, and (2) increased downside risks to growth, mostly traceable to the euro area crisis. Sterling dropped as a result, from GBP/USD 1.57 to 1.55. The decline was more contained than it could have been, thanks to last week’s announcement by the BoE and the Chancellor of the Exchequer that a programme will be implemented in the short term to stimulated the economy, in light of the deterioration of the picture for the euro area. Next week, however, the trend of the pound risks being guided mostly by the euro’s, in response to the developments of the crisis. Of forthcoming data releases, the most important will be the final estimate of Q1 GDP, which, however, should not have market implications, barring revisions. Otherwise, sterling is unlikely to move of its own accord before the week after next, when the BoE is due to meet (4-5 July).
JPY – The yen budged only on the dollar’s response to the FOMC, and dropped from USD/JPY 78 well into the 80 area. A “definitive” breakthrough of USD/JPY 80 will probably require “conclusive” and favourable developments of the euro area crisis next week.
Appendix
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