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BoE minutes and FOMC press conference the focus

O/N BULLETS

• Greek confidence vote passes
• IMF says Spanish risks still considerable

USD

the USD remains unloved as long as the soft patch in the US economy emphasises that there is a long way to go before the US will consider tighter policy. the USD has managed some gains in the last month as yields have fallen more elsewhere than they have in the US, but this suggests that any risk recovery will also prove USD negative, since at this stage there is more scope for yields to recover elsewhere. It seems unlikely that Bernanke will do anything other than stress the long road ahead at the FOMC press conference today, so it is hard to see a trigger for further USD gains other than negative news on growth or risk from elsewhere.

EUR

The Greek confidence vote passed as expected, and the EUR has managed to make modest gains, but the focus now passes to the budget passage and implementation, which is more contentious. But perhaps more of a concern for the EUR is the lack of any real progress in designing a new debt solution for Greece, and the fear is increasing that this may drag out well beyond the new deadline of early July. This could be damaging for the EUR, but for today it seems the focus will be more on the US FOMC and EUR/USD may extend yesterday’s gains.

GBP

Today’s MPC minutes seem certain to be more dovish than the last set after dovish comments from King and Fisher of late, but this should by now be in the market with the first UK rate hike now priced in for next may (!). Nevertheless, the shape of the minutes will be interesting with Broadbent’s first vote and the exit of Sentance changing the balance, but it seems likely that Weale and Dale will vote for a rate hike, and Posen for more QE, with the others looking for no change. This makes next may if anything still look on the late side for a hike, but sterling impact seems likely to be modest if this voting pattern emerges.

Equities Equities have had a long but relatively shallow move down over the last 7 weeks, but look ripe for a recovery after the positive Greek confidence vote. while this may not last if the EU fails to sort out the next Greek bailout package, there is scope for a relief rally from here. We would argue that European markets look particularly good value, suggesting scope for gains in European risk positive currencies, with the SEK the most obvious.

Spotlight – NOK weakness looks overdone – the NOK has suffered against the EUR in the last week or so in spite of, or perhaps because of, the nerves surrounding Greece. the General decline in risk appetite that has resulted from this, and from the soft patch in global economic data, has led to a General unwinding of positions, which has affected all higher yielding currencies. the NOK has also been affected by a weakening in the oil price. But Norway’s big current account and budget surpluses make it an obvious safe haven too, as long as the oil price is not in sharp decline. Expect the NOK to make gains across the board if risk appetite starts to recover, while downside now looks limited as long as the oil price holds above the may lows

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This entry was posted on July 1, 2011 at 9:25 pm and is filed under Forex Articles. You can follow any responses to this entry through the RSS 2.0 feed.