Pound Struggles Above 1.41 in Quest for Momentum
Updated currency market reactions to the Greek referendum result and the ensuing actions taken by the ECB and European politicians.
The euro was sharply lower on news that the Greek population has rejected the terms and conditions required to unlock billions of pounds worth of loans from creditors.
However, in typical fashion the shared currency showed its mettle and in mid-day trade in London the euro complex, while lower, is looking steady and well within recent ranges against the majors:
- The pound to euro exchange rate conversion is 0.69 pct higher at 1.4115. A high of 1.4173 when markets opened on Sunday.
- The euro to pound pair is converting 0.7085.
- The euro to dollar is at 1.1017. A low of 1.0970 was seen at market open on Sunday following the Greek result.
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We said ahead of the vote that we could not be 100% sure whether any significant moves in the euro exchange rate complex would occur following a 'no' result - of late the euro has been incredibly immune to the Greek crisis and in many ways this is to be expected if we consider Greece represents less than 2% of the Eurozone economy.
Simply put we get the sense that markets are pricing in a deal ultimately being reached with the resignation of finance minister Varoufakis being a key indicator that Greece will agree to some sort of a deal.
Ultimately though, for the pound to euro exchange rate the ability to reach higher levels will likely depend on the reaction of the ECB.
Will the ECB boost its asset purchase programme in coming weeks in order to shore up peripheral Eurozone economies? If there are signs of an acceleration then the euro will likely feel real pressure.
For us watching ECB comment will therefore be key.If the pace of buying picks up we could finally see the GBP-EUR break higher out of what is now a well-worn path capped by 1.42. For now we believe spikes higher and lower in GBP-EUR are likely to brief.
Indeed, the 1.40 - 1.42 area is forecast to be remain a touchstone for this currency pairing while the EURUSD is likely to be supported above 1.10.
Outlook for the Euro
The key question now, from a currency market perspective, is whether the EUR is likely to weaken further from here.
TD Securities have been quick off the mark with their predictions:
"Looking forward, we think this backdrop will keep the EUR under pressure over the next several days until the next phase of political questions are answered. We think it will be harder for the EUR to repeat last week’s performance and stage a slow recovery over the next several days. From here, we think the threshold for recovery is now higher."
"We think there is scope for the EUR’s declines to extend for a day or two more ahead of Tuesday’s EU leadership summit, assuming it actually goes forward."
ECB Stands Ready to Act
"Recent price action shows that risk-off sentiment and lower core bond yields are often at least as negative for the dollar as for the euro. The immediate fate of the euro will probably depend more on expectations on further ECB actions," note Piet Lammens at KBC Markets confirming our view that ECB reaction is central to the euro's outlook.
As Greeks voted we heard some talk coming out of the ECB with ECB board member Benoit Coeure maintaining the ECB line that whatever action is required will be delivered to keep Greece and other peripheral Eurozone economies solvent:
"In the current circumstances of great uncertainty in Europe and the world, the ECB has been clear that if we need to do more we will do more. We will find the necessary instruments.
"Our will to act in this matter should not be doubted."
Meanwhile, the central bank of Greece is set to ask the ECB to turn its liquidity tap on and review the €60 ATM limit.
Should any Greek banks be shown to struggle over coming days we could see negative market reactions and sharp declines in the euro. Those with outstanding euro payments should be ready and ensure their FX provider has the relevant buy orders in place to take advantage of sudden moves in their favour.
Longer Term Outlook: A Stronger Pound on a Strong Domestic Economy
Looking beyond the short-term market implications pound sterling remains favoured against the euro and other majors purely on the underlying strength of the UK economy.
Recent UK PMI surveys indicate that the pace of economic growth rebounded in June, recovering from what appears to have been a brief lull caused by the general election.
Slower growth in a manufacturing sector that continues to be hurt by the strength of sterling was offset by faster rates of expansion in services and construction, suggesting GDP growth will accelerate from 0.4% in the first quarter of the year to 0.5% in the three months to June.
The buoyancy of the service sector PMI survey data in particular increases the possibility of interest rates rising later this year, especially when viewed alongside the recent upturn in wage growth to the highest since early-2009.