EUR/USD: Greece Headlines Likely To Keep Market Jumpy

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  • European Central Bank head Mario Draghi said the short end of the money market curve is well anchored and that financial stability risks are contained for now. Asked about the possibility of contagion if Greece drops out of the euro, the central banker replied that the EU was now in uncharted waters. The ball was now in Greece’s court, he added, and stressed that urgent action was necessary. Draghi said the ECB will continue to provide liquidity to Greece’s banks for as long as they are considered credit-worthy and as long as there was the prospect of a positive outcome in the negotiations between Greece and its creditors.
  • Greece and its creditors hardened their stances after the collapse of talks, prompting Germany’s EU commissioner to say the time had come to prepare for a state of emergency. The European Commission said it would only resume mediation efforts if Greece put forward new proposals, while the Greek government spokesman said Athens was sticking to its rejection of wage and pension cuts and higher taxes on basic goods.
  • Greek Prime Minister Alexis Tsipras is going ahead with a planned visit to Russia from Thursday, the day Eurozone finance ministers hold a crucial meeting to review the standoff with Greece. He is due to stay till Saturday, attend an economic forum in Saint Petersburg and meet President Vladimir Putin. EU officials said that without improved Greek proposals by Thursday, the Eurogroup session would be very tough and was likely to present Greece with an ultimatum.
  • US industrial output fell 0.2% after a revised 0.5% drop in April. The market expected a 0.2% mom gain after a previously reported 0.3% fall in April. Last month,manufacturing output slipped 0.2% after gaining 0.1% in April. Manufacturing continues to be hamstrung by a strong USD. Industrial capacity use fell to 78.1% last month from 78.3% in April.
  • The EUR/USD went up today despite Greece jitters and hit a day’s high at 1.1329 in the morning of the European session. Today’s session high and 1.1335 high on June 11 is the nearest resistance area. In our opinion breaking above these levels is possible tomorrow after FOMC statement. We expect Fed to show lower interest rate projection tomorrow and that should focus the market’s attention.The forecast for the end of 2015 may stay unchanged, indicating two rate hikes in the remainder of this year, but the forecast for the end of 2016 is very likely to be cut. We expect also lowering Fed GDP growth forecasts. In March the range of projections for 2015 GDP growth was 2.3% to 2.7% and we expect this range to be reduced by about 0.2-0.3 percentage point.
  • The EUR/USD was hurt by a sharp fall in ZEW index. The decline in the headline expectations index, from 41.9 to 31.5, was much sharper than the consensus forecast of a fall to 37.1 and left the index at its lowest level since last November. This reading suggests that the German recovery is suffering from fears about the impact of the Greek crisis. ZEW current conditions index edged down from 65.7 to 62.9 in June, which is still high and confirm that the German economy is performing pretty well for now. But growth seems set to weaken next year as temporary boosts from the weaker EUR and falling energy prices fade.
  • Other data revealed that Eurozone employment rose by just 0.1% in the first quarter, leaving the annual growth rate at a slow 0.8%. Such employment growth will do little to reduce unemployment from current high rates.

GBP/USD: British CPI In Line With Expectations
(long for 1.5750)

  • Britain’s consumer prices rose 0.1% yoy in May, recovering from a fall of 0.1% in April. The reading was in line with expectations.
  • The Office for National Statistics said that upward pressure on prices in May came from a bounce-back in air fares which dragged down inflation in April on the different timing of the Easter holidays in 2015 and 2014. Fuel prices rose 1.9% mom, reflecting a recovery in global oil prices.
  • Food prices rose 0.1% mom and it was the first monthly rise since December.
  • Core inflation, which strips out increases in energy, food, alcohol and tobacco, rose by 0.9% yoy in May, picking up slightly from April.
  • Separate data showed that factory gate prices fell by 1.6% yoy in May, the slowest fall since December of 2014 and in line with expectations.
  • The GBP/USD retreated from a three-week high after data showed British consumer prices inched up just 0.1% in May, disappointing some expectations of a stronger pick-up in inflation.
  • Minutes from the Bank of England’s latest Monetary Policy Committee meeting will be released on Wednesday. Most expect the minutes to show all nine MPC members voted to keep interest rates at their record lows.Investors will be eyeing also British employment report (Wednesday 8:30 GMT), especially wage growth figures. In our opinion wage growth may accelerate as the labor market has tightened. These data are likely to support the GBP/USD.

USD/JPY: Only Minor Reaction To Kuroda Comments
(short at 123.50)

  • Bank of Japan Governor Haruhiko Kuroda said he was not making any assessment on nominal JPY levels or predicting its future moves when he described the JPY as being very weak in comments to parliament last week.Let’s remind that the JPY jumped against the USD when the central bank chief said the JPY’s real, effective level was already very weak and was unlikely to weaken further.
  • Speaking again in parliament today, Kuroda said he made the remark to explain the JPY’s historical trend on a real, effective basis and was not signalling that the currency’s nominal levels were too weak. He repeated that while a weak JPY boosts exports and revenues at companies operating overseas, it hurts households and non-manufacturers by pushing up import costs.
  • Bank of Japan Deputy Governor Kikuo Iwata said the central bank has enough capital buffers to ensure its balance sheet will not be severely damaged when it exits its massive stimulus programme.
  • Japanese Finance Minister Taro Aso said his ministry attaches the utmost importance to raising the sales tax to 10% as planned in April 2017. The government must prevent the economy from contracting since that would mean it would be unable to raise the tax as planned.
  • The USD/JPY went up slightly after comments from Kuroda, but it does not change our outlook.
  • The Bank of Japan meeting is scheduled for Friday. We do not expect any policy changes. In our opinion markets will withdraw expectations for additional quantitative easing in Japan soon, which should support the JPY. In our opinion Japan’s fundamentals are likely to recover further and some upside surprises could encourage investors to buy JPY.



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