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    European Session – Euro falls below 1.14 after German rejection of Greek loan extension proposal

    Posted on February 19, 2015 by the XM Investment Research Desk at 3:22 pm GMT

    FB-eurogroup3Greece’s official request for a loan extension and a less hawkish – than- expected set of FOMC minutes were the core drivers of the currency markets in the last 24 hours.

    The euro rallied from late Wednesday to reach a high of 1.1449 in late morning European session trading. Helping extend the rally were a few developments regarding Greece. The first was news that the ECB approved a further ELA increase (Emergency Liquidity Assistance) by 3.3bln euros to 68.3bln, although this was less than what Greece requested.

    Meanwhile, other news today that lifted the euro was the Greek government confirming that it requested an extension on its loan agreement. While this was encouraging, it was rejected by Germany. According to the German finance ministry, the Greek proposal does not correspond to the criteria agreed on Monday by the Eurogroup and it was “not a substantial solution” as it failed to fulfil conditions of an EU/IMF bailout programme. All eyes are now on the Euro zone finance ministers meeting on Friday afternoon in Brussels where they will consider this request.Greece responded to Germany’s rejection by saying that it is up to the Eurogroup to decide whether or not to reject or accept the proposal.

    In reaction to Germany’s rejection of the Greek proposal, the euro tumbled to a day’s low of 1.1354. Against the yen it fell to 134.93 before steadying at 135.40.

    Other news from the Eurozone was the release of the first set of minutes of the ECB policy meeting in January. They did not have much impact on the markets as they provided very little in the way of new information and were largely a summary of the Bank’s decisions. The Eurozone consumer confidence index released today was encouraging as it rose more-than-expected in February by giving a reading of -6.7 points from a previous- 8.5 versus -7.55 expected.

    Meanwhile the type of minutes that had a bigger impact on the markets were the FOMC minutes released on Wednesday from the Fed’s January 27-28 policy meeting. The core takeaway was that the minutes were less hawkish than markets had expected and thereby reduced the chances of a June rate hike. Focus now turns to Fed Chair Janet Yellen’s testimony before Congress next week. This will be an important event for insight into the Fed.

    The dollar weakened across the board after the FOMC minutes but recovered most of its losses by today. The negative effect on the dollar from the Fed minutes was offset by upbeat US initial jobless claims data today. The number of Americans applying for unemployment benefits decreased by more than forecast in the week ending February 14 and fell by 21,000 to 283,000, from 304,000 in the prior week. The forecast was for 293,000 claims.

    The dollar recovered to a high of 119.17 yen, up from an earlier day’s low of 118.42 that was hit in the Asian session. It fell back slightly after news that the Philly Fed manufacturing index missed expectations and came in at its lowest since February 2014, at 5.2 from 6.3 versus 9.3 expected.

    Sterling held onto most of the gains made against the dollar from Wednesday’s rally.  The only UK data today was on CBI trends (based on UK factory orders). The index beat forecasts by printing a reading of 10 from a previous 6 and above the 6 expected. The pound mostly traded in a range, with a high of 1.5464 before easing lower to around 1.5425 in early US session trading. The next risk event for sterling will be Friday’s UK retail sales data.

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