Risk appetite in the currency markets improved greatly by the end of the week and led to a relief rally in the euro on optimism of a Greek deal soon. After the Greek government submitted reform proposals late on Thursday to its creditors that were mostly in line with what the Eurogroup is expecting, the chances for an agreement for a bailout have increased significantly and the likelihood of a Grexit has diminished.
Greece has applied for a three-year 53.5 billion euro loan through the ESM (European Stability Mechanism) and in exchange will make reforms on taxes and pensions. Greek Prime Minister Alexis Tsipras is now looking to secure the support of his parliament by the end of Friday while the Eurogroup reviews the proposal. There is the potential to cancel a meeting that was initially scheduled for Sunday with all twenty-eight European Union member countries at an EU Summit in Brussels.
The euro outperformed today to rally over 1% against the dollar and hit a high of 1.1215, the strongest level since June 30. The euro is on track to end the week with gains against the dollar after gapping lower to drop below 1.10 at the start of trading on Monday in reaction to last Sunday’s no-vote in the Greek referendum where more than 60% of Greeks voted against creditor’s demands.
Sterling tracked the euro higher as it moved along with broader market sentiment rather than in reaction to UK data. Greece headlines overshadowed weak UK construction output data and better British trade numbers. The pound rose about 1% against the dollar to a high of 1.5550. The main risk event for the pound will be next week’s UK employment report.
The dollar climbed back above 122.00 yen today to reach as high as 122.68. The rally was driven by an improvement in risk appetite as the demand for the safe-haven yen faded following a recovery in the Chinese stock markets and hopes of a Greek deal. A main driver for the dollar/yen pair will be next week’s Bank of Japan policy meeting and a testimony by Fed Chair Janet Yellen. Her speech will be closely watched for any insight into the Fed’s outlook on the US economy and if it sees any broader risks (such as Greece and China) that would delay a rate hike this year.
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