Caution has been the underlying tone to currency market trading so far on Tuesday with the unexpected “risk on” sentiment that appeared this time last week failing to resurface. The EURUSD dipped around 50 pips lower to 1.1275 after the Greek Defence Minister stated Greece could turn its attention to the US, Russia or China if it fails to reach a new debt agreement with the Eurozone. There were already so many possible risks ahead of tomorrow’s crunch Eurogroup meeting surrounding Greece exiting the Euro that unveiling a possible “plan b” has just added to the uncertainty. Tensions were already increasing following Greece Prime Minister Alexis Tsipras reaffirming his plans to reject an international bailout extension only days before the emergency meeting takes place.
To be honest, with so many concerns surrounding the global economy right now and including a complete divergence in economic and monetary sentiment around the globe, an unexpected collapse in the price of oil and major central banks undertaking complete U-turns on commitments to monetary policy, I think the last thing anybody wants is for investors to be further spooked by the possibility of Greece exiting the Euro. The only problem is that this battle between Greece and its creditors is very much about who is willing to step into the circle and make a compromise first, and neither party will want to extend its hand.
Action in the GBPUSD has been noteworthy with the pair managing to alternate between both bullish and bearish momentum. The GBPUSD climbed to around 1.5238 after the UK manufacturing production came in above expectations, following a trend seen last week when a hat trick of PMIs (construction, manufacturing, services) was revealed above forecasts and provided investors with comfort that the UK economy has commenced the year with robust momentum. The GBPUSD has struggled to maintain gains and this is probably for two reasons. Firstly and as seen by UK Prime Minister David Cameron chairing a contingency meeting to discuss Greece, the UK economy would face possible risks if Greece exited the Eurozone. Secondly, the BoE’s dovish views on inflation are likely to be repeated when the BoE’s inflation report is released on Thursday.
Switching back to Greece, there was some optimism that after the Prime Minister and Finance Minister completed a tour around Europe that its stance might have softened slightly. It hasn’t and in truth, it has done the complete opposite as the resistance from Greece is probably even stronger now than it was before the tour. This also means that the risks of Greece exiting the Euro are even stronger now than they were before as well.
Some of the capitals visited would have showed some willingness to listen to a proposal to renegotiate loans but you can also understand the reluctance shown from the ECB and German Finance Minister. If it conforms to Greece’s demands, it is only going to encourage other nations to attempt to renegotiate its own debts. Not only this, but the risks are still there for other anti-austerity parties to emerge throughout Europe. This would represent a nightmare scenario for the ECB because at a time when the ECB is constantly crying for more structural reforms to compliments its stimulus measures, the last thing it could possibly want is more anti-austerity parties to emerge from the woodwork.
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