PBoC under pressure while Greece dominates

Rekindled concerns over an economic slowdown in China are continuing for the second successive day, following overnight data confirming China inflation levels have reached a new five-year low. With the price of oil having made new lows throughout January and repeated indications that domestic growth is slowing, inflation levels were expected to continue showing weakness in January. However, the annualised 0.8% reading was below the 1% expected and this coming just one day after imports to China declined by a whopping 19.9% will strengthen pressure on the People’s Bank of China (PBoC) to implement further economic stimulus measures beyond the reserve ratio requirement cut late last week. With inflation levels likely to remain low for some time, I continue to see the likelihood of the PBoC further reducing interest rates.

In a day absent of any major economic news, volatility in the currency markets calmed down on Monday. The majority of headlines concentrated on Greece Prime Minister Prime Minister Alexis Tsipras reaffirming his plans to reject an international bailout extension merely days before an emergency Eurogroup meeting, which resulted in the European markets trading lower. Investors were alarmed by the defiant statements made by Tsipras during his first policy speech as the Prime Minister of Greece, with the tough stance being displayed heightening the risk of Greece exiting the Euro.

After both the Greek Prime Minister Tsipras and Finance Minister Varoufakis completed a tour around Europe to discuss its bailout program to mixed responses, it was hoped that the stance from Greece might have softened slightly. In truth, it seems to have done the opposite because the resistance from Greece appears to be as strong as ever. While some of the capitals visited last week may have offered Greece an understanding tone by showing some willingness to listen to their proposal and calming down uncertainty over a possible Greece default, it was the meetings with ECB President Mario Draghi and the German Finance Minister that heightened anxiety over the looming issue.

Investors are clearly going to be anxious over the Eurogroup meeting, with the EURUSD most likely being traded with caution beforehand as a result. The likely concern some European leaders are thinking about is that 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.

The GBPUSD is also being traded with caution before the Eurogroup meeting, which highlights how the situation in Greece could have a domino effect elsewhere too. It was reported that yesterday morning, UK Prime Minister David Cameron chaired a meeting on the possible economic impact the UK would face if Greece exited the Eurozone. This has just added an extra downside risk to a currency that is already likely to be under pressure when the Bank of England (BoE) inflation report is released on Thursday. The BoE’s strong views on inflation are very much well-known and they are likely to repeat them again this week.

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