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Forex markets: Waiting on Greece: euro below EUR/USD 1.30, but how far below?

Waiting on Greece: euro below EUR/USD 1.30, but how far below? The Bank of England refrained from adding monetary stimulus, but sterling only rose slightly: all eyes are now on next week’s Inflation Report...


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EUR – The euro continued to lose ground this week, finally breaching the psychological threshold at EUR/USD 1.3000, penalised by the outcome of Sunday’s elections. If by the end of this week a new government is not successfully formed in Greece, the resulting heightening of uncertainty on resolution scenarios for the euro area debt crisis should further depress the single currency. Technically, the targets of the early-May downswing are still 1.2827 and 1.2624. Following the “Greek test”, next week will see the release of a host of economic data, both in Europe and the United States. The poorer the former are compared to the latter, the more penalised the exchange rate should be. However, some downside stickiness may persist, due to the size of short euro trades on the market, and to close-to-zero short-term euro yields, both in absolute terms and in relation to US yields.

GBP
– Next week should prove important for the pound. The key event will be the release of the Inflation Report on Wednesday. In the meantime, the Bank of England left rates unchanged – as widely expected – and, most importantly, it announced no further monetary stimulus. The decision to leave the APF unchanged was not totally taken for granted: in recent days, doubts had arisen that the BoE could have opted for a last-minute “act of generosity”, given the latest negative developments in the euro area. In our view, the central bank’s inaction could mark the end of the expansive phase. The Inflation Report should shed light on this. We expect inflation projections to be revised upwards, as opposed to a lowering of growth estimates for this year. Estimates for next year should stay broadly unchanged. In an alternative scenario, the BoE could decide not to revise growth expectations downwards, neither in the short term, nor in the medium. In this case, we would change our projections for sterling, eliminating levels lower than GBP/USD 1.55 on the 1m and 3m horizons (see table). If on the other hand, some downside risk to growth is kept incorporated in the BoE’s scenario, and the central bank lets on that the door on further monetary stimulus still hasn’t been definitively closed, we would keep open the possibility of a correction towards GBP/USD 1.55 or just under, albeit probably only on a 1m or 3m horizon, and not on both. In either case, we do not see conditions for the start of an uptrend between 1.60 and 1.65, capable of raising to GBP/USD 1.60 the floor of the exchange rate fluctuation range on the 1m-3m horizon. Such an assumption would in fact seem consistent with the start of an exit strategy, that seems unlikely any time soon. The pound’s inability to overcome the GBP/USD 1.6200 threshold following the BoE’s announcement also seemed to be a signal of sluggishness for the UK currency.

JPY –
No major stories for the yen. In the event of lingering uncertainty/tensions tied to the Greek crisis, the USD/JPY exchange rate could struggle to definitively break through the 80.00 mark on the upside – barring surprisingly negative Japanese data, to the point of triggering the intervention of the BoJ (at least in vocal terms), or especially positive US data.


Appendix
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