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Euro weakens after Merkel says last proposal is final offer

EUR

The euro weakened on Friday after it appeared creditor institutions had finally run out of patience with the Greeks. Chancellor, Angela Merkel said there would be no alternative to the current offer being tabled by creditors. She urged Greek Prime Minister Alexis Tsipras to accept this “extraordinarily generous offer,” making it clear she would not intervene to try to broker an alternative in the event of another failure.

The offer however, has already been rejected by Greece, increasing fears that a meeting on Saturday will not achieve the breakthrough required. Commentators are saying that if a deal cannot be done over the weekend Greece will probably default on its IMF repayment on Tuesday. The IMF has diffused the situation, however, by saying they would treat a failure to pay on Tuesday as “arrears” rather than a default.

The main area of difference is in the area of corporate taxation. The Greeks want to make a one off charge of 12% on net profits on businesses with profits of over 500k a year. Creditors, however, argue this will damage the economy.

Creditors have now turned from discussing a deal to talking about a ‘Plan B’, of what to do if Greece leaves the euro, and how to ring-fence contagion; in a sign which sums up the hardening mood in Brussels, as well as the thinning patience of creditor officials, and euro-area leaders on the matter. Meanwhile Tsipras must contend with a rebellion amongst his own ranks who feel he has made too many concessions already.

On the data front the German Import Price Index fell by a deeper-than-expected -0.2% mom and -0.8% yoy. Euro-zone Money Supply also came out lower, at 5.0% 3-months to May and 5.0% yoy to May.

USD

The dollar rose on Friday after Michigan Confidence (final estimate) rose to 96.1 from 94.6 previously, when it had been expected to remain unchanged.

The greenback may also have been supported by a rise in 10-year U.S yields which increased by 7 basis points to 2.47%.

In relation to Greece, tensions seemed to placate as the overwhelming feeling amongst analysts was that a deal of some sort would be done in time to avoid a default.

The IMF provided relief after saying that even if Greece failed to make the June 30 payment on Tuesday, it would not be taken as a default, rather as being in arrears, potentially giving negotiators more time.

In terms of the detail of the University of Michigan survey, the break-down went as follows: 1yr inflation expectations remained at 2.7%, 5-10yr at 2.6% (down from 2.7%), Current Conditions rose to 108.9 from 106.8, and Expectations rose to 87.8 in June from 86.8.

GBP

The pound traded mixed on Friday as a lack of data and news relevant to the currency meant it was more influenced by news impacting on its counterparts, although the recent run of robust data provided underpinning support for the currency.
Chancellor George Osborne has said he wants to make 30bn of cuts to balance the budget as soon as possible, however, the Paris-based OECD warned that the government could be making too many cuts too quickly, running the risk of quashing the fragile recovery. The OECD has up until now been a strong advocate of the government’s fiscal track record and this is the first sign of disagreement. The U.K based OBR (Office for Budget Responsibility) made a similar warning.

Amongst the government plans are cutting 12bn from the benefit’s budget. One possible source of saving is expected to come from slashing in-work benefits, however, apart from the fear this could tip many families into poverty, it could also hand-cuff consumer spending, leading to a slow-down on the high-street.

JPY

The yen weakened slightly on Friday after rather tepid inflation data was released overnight.

Japan’s core inflation excluding volatile fresh foods, edged up 0.1% on year in May compared to 0.3% in April and beating economists expectations of zero growth. At the same time Tokyo Core CPI climbed 0.1% in June following a 0.2% rise in the preceding month.

However, fuel prices and other energy costs curbed consumer price gains in the world’s third largest economy. The BOJ remains concerned that a deflationary mind-set might re-emerge among consumers if it takes too long for inflationary pressures to start building again.

Household expenditure on the other hand jumped 4.8% yoy in May, recording the first increase since the sales tax increase in April 2014, in an attempt to pay down a large national debt.

In a recent survey only 2 of 32 economists see the BOJ reaching its 2% target by September next year with a majority forecasting an eventual increase in stimulus.

The yen was trading at 123.86 per dollar towards the close of the New York session.

EUR

The euro weakened on Friday after it appeared creditor institutions had finally run out of patience with the Greeks. Chancellor, Angela Merkel said there would be no alternative to the current offer being tabled by creditors. She urged Greek Prime Minister Alexis Tsipras to accept this “extraordinarily generous offer,” making it clear she would not intervene to try to broker an alternative in the event of another failure.

The offer however, has already been rejected by Greece, increasing fears that a meeting on Saturday will not achieve the breakthrough required. Commentators are saying that if a deal cannot be done over the weekend Greece will probably default on its IMF repayment on Tuesday. The IMF has diffused the situation, however, by saying they would treat a failure to pay on Tuesday as “arrears” rather than a default.

The main area of difference is in the area of corporate taxation. The Greeks want to make a one off charge of 12% on net profits on businesses with profits of over 500k a year. Creditors, however, argue this will damage the economy.

Creditors have now turned from discussing a deal to talking about a ‘Plan B’, of what to do if Greece leaves the euro, and how to ring-fence contagion; in a sign which sums up the hardening mood in Brussels, as well as the thinning patience of creditor officials, and euro-area leaders on the matter. Meanwhile Tsipras must contend with a rebellion amongst his own ranks who feel he has made too many concessions already.

On the data front the German Import Price Index fell by a deeper-than-expected -0.2% mom and -0.8% yoy. Euro-zone Money Supply also came out lower, at 5.0% 3-months to May and 5.0% yoy to May.

USD

The dollar rose on Friday after Michigan Confidence (final estimate) rose to 96.1 from 94.6 previously, when it had been expected to remain unchanged.

The greenback may also have been supported by a rise in 10-year U.S yields which increased by 7 basis points to 2.47%.

In relation to Greece, tensions seemed to placate as the overwhelming feeling amongst analysts was that a deal of some sort would be done in time to avoid a default.

The IMF provided relief after saying that even if Greece failed to make the June 30 payment on Tuesday, it would not be taken as a default, rather as being in arrears, potentially giving negotiators more time.

In terms of the detail of the University of Michigan survey, the break-down went as follows: 1yr inflation expectations remained at 2.7%, 5-10yr at 2.6% (down from 2.7%), Current Conditions rose to 108.9 from 106.8, and Expectations rose to 87.8 in June from 86.8.

GBP

The pound traded mixed on Friday as a lack of data and news relevant to the currency meant it was more influenced by news impacting on its counterparts, although the recent run of robust data provided underpinning support for the currency.
Chancellor George Osborne has said he wants to make 30bn of cuts to balance the budget as soon as possible, however, the Paris-based OECD warned that the government could be making too many cuts too quickly, running the risk of quashing the fragile recovery. The OECD has up until now been a strong advocate of the government’s fiscal track record and this is the first sign of disagreement. The U.K based OBR (Office for Budget Responsibility) made a similar warning.

Amongst the government plans are cutting 12bn from the benefit’s budget. One possible source of saving is expected to come from slashing in-work benefits, however, apart from the fear this could tip many families into poverty, it could also hand-cuff consumer spending, leading to a slow-down on the high-street.

JPY

The yen weakened slightly on Friday after rather tepid inflation data was released overnight.

Japan’s core inflation excluding volatile fresh foods, edged up 0.1% on year in May compared to 0.3% in April and beating economists expectations of zero growth. At the same time Tokyo Core CPI climbed 0.1% in June following a 0.2% rise in the preceding month.

However, fuel prices and other energy costs curbed consumer price gains in the world’s third largest economy. The BOJ remains concerned that a deflationary mind-set might re-emerge among consumers if it takes too long for inflationary pressures to start building again.

Household expenditure on the other hand jumped 4.8% yoy in May, recording the first increase since the sales tax increase in April 2014, in an attempt to pay down a large national debt.

In a recent survey only 2 of 32 economists see the BOJ reaching its 2% target by September next year with a majority forecasting an eventual increase in stimulus.

The yen was trading at 123.86 per dollar towards the close of the New York session.



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