Major currencies trade in tight margins, unfazed by Greek drama

Enrique Díaz-Álvarez23/Φεβ/2015Currency Updates

It was an unusually quiet week in currency trading. The dramatic headlines coming from the negotiations between the Greek Government and its creditors had relatively little impact on FX markets and the Euro, which moved in a range of barely above 1% all week to end essentially unchanged. Greece and the Troika (now rechristened «institutions») were able to reach a preliminary agreement, though the final approval is still dependent on Eurozone officials agreeing to Greek proposed reforms on Monday. In spite of the constant stream of proposals, ultimatums, and cancellations, calm prevailed in markets, with the exception of Latin American currencies which continued to struggle last week pressured by portfolio outflows.


Last week news out of the UK fully supported our view that the Bank of England will hike interest rates before the end of the year. Both inflation and the labour market provided pleasant positive surprises last week. The former fell again, to 0.3% from 0.5% but, stripping energy prices (which the Bank of England has indicated it is not concerned with), core inflation actually ticked up to 1.4% from 1.3%, a move in the right direction and not very far from the BoE target. As for the labour market, in a further sign of disappearing slack, the ILO measure of the unemployment rate fell again to 5.7% in the three months to December; the December estimate was actually down to 5.6%.

Both of these critical releases confirm the positive outlook from the Inflation Report of the previous week and reaffirm our view that an interest rate hike is to be expected in the last quarter of 2015, which is still earlier than markets are pricing in.


The nail biting negotiations over Greece held the full attention of strategists and opinion makers last week, though it must be said that the FX markets were a bit more relaxed about it. After the collapse of Monday’s Eurogroup meeting, Greece yielded on Thursday and requested a continuation of the existing program. Germany took a hard line and rejected the request. In the end, on Friday Greece signed what amounts to near complete capitulation, as outflows from Greek banks accelerated and the only other option would have been to declare capital controls. The Greek Government still has to submit detailed reform proposals to be approved by the Eurogroup and the Troika. The only concession to the Greeks was the acknowledgement on the part of the Troika of the reality that the budget surplus targets for 2015 are a fantasy (as has been the case every year).

Beyond the Greek drama, macroeconomic news provided another set of positive surprises. The all-important PMI indices of business sentiment rose again in January, to a solid 53.5 level in the composite index; further, all components (new orders, employment, input prices and output prices) rose as well. It appears that the Eurozone economy is well on track to improve on the modest 1.2% growth it posted last quarter.


Last week saw a mixed batch of second-tier reports out of the US. Housing weakness contrasted with continued labour market strength. However, it is likely that at least some of the former is related to the brutal winter. Perhaps more relevant, weekly jobless claims fell yet again. This indicator and its four-week average are now considerably below where they were in January. As this is the highest-frequency measure of the strength of the US labour market, there is every reason to expect another strong job market report in two weeks’ time, which would go a long way towards clinching June as the date for the first Federal Reserve interest rate hike.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.