Euro Edges Lower as Greek Talks Keep Market in Limbo

EUR/USD ebbed to a two-day low at 1.1240 having failed to sustain gains above 1.1300 after a three-day run higher peaked yesterday at 1.1374. Another episode of false optimism with regard to alleged progress in Greece’s negotiations with its creditors played itself out, though source stories do at least seem to be confirming our view that German Chancellor Merkel is prepared to be more lenient on Greece amid geopolitical considerations than Finance Minister Schaeuble.

The latest discussions between Tsipras, Merkel and Hollande produced another commitment to “intensify” talks on a solution is hardly anything new, but comments from creditors including French Finance Minister Sapin sound tentatively more optimistic that a deal can be found.

While markets focus on the talks between heads of states, which will likely put geo-political considerations over economic issues, the EU was quick to stress that the three institutions remain key to the talks and that Juncker and Tsipras will meet in Brussels to discuss a way forward. Anything short of firm reform commitments from Greece would likely result in another kicking of the can and we could find ourselves in the same situation not before too long.

French May HICP rose to 0.3% year over year from 0.1% year over year in April, with prices up 0.2% month over month. The uptick in the headline rate was in line with developments elsewhere in the Eurozone and mainly reflects the fact that negative base effects from energy prices are falling out of the equation. The fear of deflation risks in the Eurozone should be well and truly banished now as the recovery broadens, while inflation is gradually moving higher. Divergences across the Eurozone remain high, however, but with the Eurozone firmly focused on the weaker countries and headline rates low, the ECB’s commitment to QE remains unbroken, even if central bankers seem happy to see long term rates go higher.

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