The euro edged up a smidgen on the U.S. dollar (€1.1200) on Wednesday. The greenback’s latest rally receded following the lift it got the day before from encouraging U.S. data, and comments from Federal Reserve Governor James Powell who predicted the Fed will raise rates not once, but twice this year.
Investors would be hard pressed not to find the current trading environment a challenge given the tight trading ranges. Intraday price movements among the various asset classes -- commodities, equities, fixed income and currencies -- have either been very profitable or costly to many.
Central banks have been calming investors for the past seven years with low interest rates, bond buying, and other interventions aimed at shoring up weak economies. Going forward, monetary policymakers are slowly beginning to step out of the markets in a variety of ways. This mix of overt and subtle withdrawal of support is a key macro driver of recent increased volatility. To date, the markets have been at risk of becoming distorted and overly reliant on policymakers for direction. Central bankers are herding investors back to the basics and forcing them to be more data dependent.
Despite the Grexit risk, investors are largely looking past Greece, and refocusing on U.S. data and rate expectations. Already the USD has rebounded as interest rates back up. For many, the single unit's movements over the past 24 hours has been more puzzling than anything. The market had expected that a reduction in Greek risk would be a positive for the common currency. However, the EUR's intraday moves, although not obvious, seem indifferent to the Greek talks.
It appears that the easing of tension between Greece and its European creditors is giving speculators the confidence to take on more risk, pushing the USD to build upon recent gains against the majors and commodity-related pairs. The optimism on Greece seems to be bringing the focus back on the Fed and its first potential rate hike. Once a Grexit finally gets pushed off the table, investors should be expecting the EUR's role as a funding currency to take flight again with investors turning back to U.S. economic fundamentals for directional guidance.
That being said, the Greek saga needs to come to a conclusion. European leaders want negotiations between Greece to conclude at today's Eurogroup meeting. They do not expect it to spill over into tomorrow's European Union Economic Summit. This would suggest that capital markets might not get a clear picture on how things are progressing for some time, as negotiations could go on all night. If this is the case, it could make for a long day for many traders.
Assuming that everything goes well at today's Eurogroup meeting and tomorrow's summit in Brussels, then everything is handed over to the Greek and German parliaments for approval. For Greece, voting could occur over the weekend and once completed, then the German parliament will be presented with an extension of the Greek bailout program. The Germans could vote on June 29.
However, even if Greek Prime Minister Alexis Tsipras succeeds in forging an agreement with the cash-strapped nation's international creditors, his problems are only beginning, as it’s Greece's domestic politics that may prove to be the bigger stumbling block. The prime minister has always been under pressure to produce a deal close to his agenda, but due to the urgency of the situation he has had to conform, and this has never sat well with the more radical element of Athens’ governing coalition. If Tsipras thought it was a tough sell in Europe, it's perhaps an even tougher sell domestically.
There are many moving parts to this ongoing saga, and assuming things do progress to the ratification stage by the weekend, the markets should be expecting heightened volatility as we also complete quarter and half-year-end in capital markets.
German Business Confidence Disappoints
At this very moment the European markets are finding it difficult to buy into fundamental data points as they are fixated and focused on Greece. The EUR made a weak attempt to trade ahead of this morning's German Ifo business climate numbers. Pre-release trading pushed the unit to its intraday high (€1.1227), but the headline release did not live up to expectations and has since been weighing on the single currency. German business confidence fell sharply last month, and by more than expected (107.4 versus 108.5). It's the lowest headline print in four months.
This suggests the outlook for the German economy is "muted." Year-to-date, the index has been pointing to solid economic growth for the country, and today's number indicates that it may be losing some of that momentum. Other German data has been producing mixed signals: the latest ZEW indicator of economic expectations slumped to a seven-month low, while yesterday's German purchasing managers' index was an upbeat surprise.
Nonetheless, German data adds to the notion that the European Central Bank's quantitative easing program is expected to be maintained at the current pace and run at least until September 2016. This will provide fodder for the EUR bear, especially on any single currency rallies.
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