FOREX: Euro May Not Rise On Greek Accord, Pound Braces For More QE

By Ilya Spivak, Currency Strategist

Talking Points
  • Overnight Price Action Hints Traders Bet Greek Bailout Deal to be Reached
  • Euro May Struggle to Find Support if ECB Dithers on Boosting Bank Defenses
  • British Pound Threatened with Bank of England Likely to Expand QE Efforts

Greece remains in focus heading into European hours astraders continue to wait for a final deal on the country’ssecond EU/IMF bailout. Eurozone finance ministers are set to meettoday in Brussels in an attempt to hammer out remainingdifferences, with the latest discussions reportedly marred bydisagreement regarding cuts to Greek pension plans. For their part, traders appear relativelysanguine. The Euro rose to the highest in two months overnightwhile the safe-haven US Dollar and Japanese Yen traded broadly lower, reflecting expectationsthat an agreement will be reached.

As we noted yesterday , this makes some sense. EU banks borrowed just shy of €500 billion via the ECB 3-year LTRO inlate December while Greece’s has close to €300 billion in outstanding bonds, meaning a market-widecredit crunch (akin to the one sparked by the 2008 collapse ofLehman Brothers) is now relatively unlikely even in the case of anoutright default. Greek politicians no doubt understand this meanstheir ability to hold the EU hostage with the threat of region-widemeltdown has been diminished, so officials from the so-called“troika” (the EU, ECB and the IMF) are likely to beless accommodative of their demands than previously. From thatperspective, Athens must choose which option – deeperausterity or an outright default – poses greater politicalrisks, with markets seemingly reasonable in their estimation thatthe latter will be judged as harder to sell to theelectorate.

Importantly, it is by no means guaranteed thatthe Euro will necessarily find support in a Greekbailout deal being finally complete. Indeed, the singlecurrency’s buoyancy over recent days suggests much of thatmay be priced in already. With that in mind, the spotlight turns tothe European CentralBank monetary policy announcement. Markets expect nomovement on benchmark interest rates, which generally makes senseconsidering regional economic data has been on a cautiouslyimproving trajectory relative to expectations since September. Thelarger point of interest will be what (if any) additional measuresare taken to strengthen the firewall keeping a sovereign defaultfrom becoming a wider banking and credit crisis.

As mentioned above, the banks have been givenenough through LTRO to cover Greece. Another similar outing at thenext 3-year repo later this month will probably cover Spain (close to 500 billion in outstanding debt). Craftingstrong-enough defenses to withstand serious stress in Italy , where the size of the hole left onbanks’ balance sheets in the worst case scenario is somewherebetween €1.5-2 trillion, will prove substantially moredifficult however. Rome must refinance €54.5 billion inmaturing debt over the next 30 days alone and boasts the dubioushonor of having the highest debt-to-GDP ratio after Greece in theEuro area, so traders would not be hasty in asking how the ECBplans to protect the banks if Italy begins to totter.

Elsewhere, the Bank ofEngland is expected to expand its quantitative easing(QE) program with another £50 billion in asset purchases, anoutcome that may prove to weigh on the British Pound as traders size up the exchange-rateimplications of further dilution of the money supply. Economic datahas performed increasingly poorly relative to expectations sinceearly December. Meanwhile, priced-in medium term inflationexpectations declined (albeit narrowly so) over recent monthsdespite Mervyn King and company’s £75 billion boost toQE in October. Economists’ median expectations for UKeconomic growth in 2012 have been in precipitous decline for sometime, so the risk of overshooting with too much stimulus at thispoint is arguably far smaller than that of being tootimid.

Asia Session : What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Unemployment Rate (4Q)

6.3%

6.5%

6.6%

21:45

NZD

Employment Change (QoQ) (4Q)

0.1%

0.4%

0.2%

21:45

NZD

Employment Change (YoY) (4Q)

1.6%

1.9%

1.1%

21:45

NZD

Participation Rate (QoQ) (4Q)

68.2%

68.5%

68.4%

23:50

JPY

Housing Loans (YoY) (4Q)

2.2%

-

2.1%

23:50

JPY

Japan Money Stock M2 (YoY) (JAN)

3.0%

3.1%

3.1%

23:50

JPY

Japan Money Stock M3 (YoY) (JAN)

2.6%

2.6%

2.6%

23:50

JPY

Machine Orders (MoM) (DEC)

-7.1%

-5.0%

14.8%

23:50

JPY

Machine Orders (YoY) (DEC)

6.3%

8.5%

12.5%

00:30

AUD

NAB Business Confidence (4Q)

1

-

-3 (R+)

1:30

CNY

Producer Price Index (YoY) (JAN)

0.7%

0.8%

1.7%

1:30

CNY

Consumer Price Index (YoY) (JAN)

4.5%

4.0%

4.1%

2:00

JPY

Tokyo Average Office Vacancies (JAN)

9.23

-

9.01

5:00

JPY

Consumer Confidence (JAN)

40.0

38.5

38.9

E uro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:45

CHF

SECO Consumer Confidence (JAN)

-22

-24

Low

7:45

EUR

French Survey of Industrial Investments (JAN)

-

-

Low

9:30

GBP

Industrial Production (MoM) (DEC)

0.2%

-0.7%

Medium

9:30

GBP

Industrial Production (YoY) (DEC)

-3.1%

-3.1%

Medium

9:30

GBP

Manufacturing Production (MoM) (DEC)

0.2%

-0.2%

Medium

9:30

GBP

Manufacturing Production (YoY) (DEC)

0.3%

-0.6%

Medium

9:30

GBP

Visible Trade Balance (£) (DEC)

-8600M

-8644M

Low

9:30

GBP

Trade Balance Non EU (£) (DEC)

-5000M

-5021M

Low

9:30

GBP

Total Trade Balance (£) (DEC)

-2700M

-2566M

Low

12:00

GBP

BOE Asset Purchase Target

325B

275B

High

12:00

GBP

Bank of England Rate Decision

0.50%

0.50%

High

12:45

EUR

European Central Bank Rate Decision

1.00%

1.00%

High

15:00

GBP

NIESR GDP Estimate (JAN)

-

0.1%

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3225

1.3393

GBPUSD

1.5767

1.5980

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya , e-mail ispivak@dailyfx.com . Follow me on Twitter at @IlyaSpivak

To be added to Ilya 's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/euro_open/2012/02/09/FOREX_Euro_May_Not_Rise_on_Greek_Accord_Pound_Braces_for_More_QE.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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