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IronFX Daily Commentary | 15/06/15

Greek debt talks break down Talks between Greece and its EU creditors collapsed on Sunday, with lenders saying that the gap between the two parties may be too wide to bridge. With no deal being reached on a technical level, it is up to politicians to take difficult decisions. The focus now turns to a June 18 Eurogroup meeting and the Eurozone leaders’ summit on June 25. A final agreement on Thursday’s Eurogroup meeting seems unlikely, and therefore I would expect tough decisions to be made by the bloc’s leaders. The EUR lurched lower on Asian opening session, as the deadline to reach a bailout deal fast approaches. We expect the common currency to remain under selling pressure. This could also weigh on DAX and Eurostoxx 50 and could push them a bit lower, as the uncertainty over a solution on Greek debt is building up.

Today’s highlights: Eurozone’s trade surplus for April is due to be released.

From Sweden, we get the official and PES unemployment rate for May. Following the unexpected rise of the CPI on Thursday, this is likely to take same pressure off the Riksbank to cut rates deeper into the negative territory. A decline in the unemployment rate could add to these

In the US, industrial production for May is expected to rebound from the month before, while the Empire State manufacturing index is expected to show that business conditions for NY manufacturers have improved in June. A rebound in industrial production could prove USD-positive.

We have several ECB speakers on Monday’s agenda: President Draghi, Governing Council member Ewald Nowotny, Governing Council member Jens Weidmann and Executive Board member Peter Praet. All speakers could some volatility in the markets.

As for the rest of the week, the highlight will be the Federal Open Market Committee (FOMC) meeting on Wednesday. The last three statements from Fed officials were all unanimous, but that could have been only the calm before the storm. The policy statement to be released on Wednesday could bring an end to this quiet period with a few dissenters voting for a rate hike. In such a case, the dollar would be likely to strengthen and to regain its glamour. On the other hand, no dissenters would probably cause the greenback to weaken against its peers.

Even though we had some disappointing US job data and soft retail sales in recent months, the former seem to have improved recently and the latter rose on Thursday with April’s figure being revised up moderately. These add to evidence that the US growth is likely to rebound in Q2.

The Committee will also give new forecasts for the economy, inflation and interest rates, including the famous “dot plot” of Fed funds rate expectations. Fed Chair Yellen holds a press conference following the decision. The market will be looking for hints if the September meeting, which is also accompanied by a press conference could be the month that they start normalization. Already FOMC days tend to be more volatile than the average day, and FOMC days with a press conference tend to be more volatile than FOMC days without one. Therefore, get ready for some big moves.

On Tuesday, during the Asian day, the Reserve Bank of Australia releases the minutes of its June policy meeting. At this meeting, the Bank kept its cash rate unchanged as was expected and the statement accompanying the decision was neutral, with no clear bias with regards to the direction of the next move in rates. The minutes will probably have a similar tone with the statement and to the recent speech of RBA Governor Stevens who showed readiness to adjust policy if needed.

As for the indicators, in the UK, we get the CPI for May. In April, the nation slipped into deflation as the headline CPI rate fell to -0.1% yoy, in line with BoE expectations of a negative rate. What is more, the core inflation rate slowed, printing the lowest core rate since 2001. GBP/USD tumbled on the news as the decline in the core rate suggests low inflation is not merely a matter of low oil prices and prices may not rise even when the effects of low oil prices fade from the data. Anything that increases the risk that the BoE is likely to miss its inflation target pushes back expectations of a rate hike and leaves GBP vulnerable, in my view.

The German ZEW survey for June is coming out. The survey for May added to the weak data from the country with both indices falling below market expectations. A strong survey is needed to confirm that Germany, Europe’s largest economy, is still gaining momentum.

In the US, housing starts and building permits for May are to be released. Housing starts are forecast to decline a bit but to remain above 1mn, while building permits, the more forward-looking of the two indicators, are forecast to moderate somewhat. Nevertheless, the overall strength in the housing sector supports the view that growth in Q2 could rebound somewhat and this could strengthen the greenback a bit.

On Wednesday, besides the FOMC meeting, the Bank of England releases the minutes of its June meeting. It will be interesting to see if there were any discussion of how the dip into deflation has affected wage negotiations and if any of the MPC members who previously voted for a rate hike are likely to resume their hawkish stance any time soon given the “range of views” in the previous statement, or if the decision was again “finely balanced”. The MPC members could also repeat their well-known phrase that “it is more likely than not that the Bank rate would rise over the three-year forecast period”.

As for the indicators, the UK unemployment rate for April is coming out. Another decline in the rate and acceleration in the growth of average weekly earnings, along with an optimistic statement could strengthen GBP somewhat.

On Thursday, we get the US CPI for May. Coming a day after the FOMC meeting and the new projections, a strong surprise is needed for investors to alter their view on the inflation outlook.

From New Zealand, GDP for Q1 is coming out. Following the recent rate cut by the RBNZ, the market reaction on GDP figures on Thursday is likely to be limited.

On Friday, during the Asian day, the Bank of Japan ends its two-day policy meeting. Market expectations are for no change in policy at this meeting. The focus will most likely be on Governor Haruhiko Kuroda press conference afterwards, especially after his recent comments in the Diet that Japan’s real effective exchange rate is already very weak and it’s hard to see it falling more. All in all, with the Bank being unable to reach its inflation target and with a JPY reluctant to weaken further according to Gov. Kuroda, the only way they could weaken their currency further is by increasing their massive QE program. Even though, we would expect them to wait to take any more action at least until July, when the results of this year’s wage negotiation should be known and the MPC members update their forecasts again.

From Canada, we get the CPI for May.


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