USD gains amid hawkish Fed, Greek risk increase

Forex News and Events

Fed’s officials are being hawkish regarding the first rate hike, increasing the odds of gradual tightening starting as soon as this year, supported by the latest CPI figures as Core CPI came in at 0.3%m/m versus 0.2% expected. Janet Yellen, reiterated its optimism about the near-term momentum of the US recovery. Federal Reserve’s Chairwomen declared that “A number of economic headwinds have slowed the recovery, and to some extent they continue to influence the outlook”. Adding that “If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalising monetary policy”. However, the Chairwomen tempered her remarks by adding “the headwinds facing our economy have not fully abated, and, as such, I expect that continued growth in employment and output will be moderate over the remainder of the year and beyond”. Mrs Yellen also made an interesting point about the job market as she acknowledged that even if unemployment rate “has come down to levels that many economists believe is sustainable in the long run without generating inflation”, current statistics don’t fully capture “the extent of slack in the labour market”. Indeed, to be classified as unemployed, people must report to actively seek work, if not they are excluded from the statistics. As a reminder, U-6 (measure including long-term unemployed and the involuntary part-time categories) reached 10.8% last April, two times the more popular U-3 measure (5.4% of total workforce for April).

The situation is therefore not that bright in the labour market and Fed’s officials are taking this information into account. Stanley Fischer said central bankers are weighing the risk of raising interest rates too early versus too late. He declared “Which is better, early and gradual or late and steep? If we raise the rate from zero it will be harder to go back to zero if there is a problem”.

Even though inflation showed signs of improvement, it won’t be enough to allow a rate hike before the end of summer. Moreover, the Fed doesn’t want to increase rate too soon and will more likely let the US economy accelerates a little bit faster before making the first move. EUR/USD is grinding lower and sits on the key support at 1.0882.

Greece to default finally? (by Yann Quelenn)

The Greek interior minister, Nikos Voutsis, has announced that in case no deal is reached between the country and its creditors, the IMF will not be reimbursed and therefore Greece will default next month. New talks have taken place to decide over unlocking new bailout funds requirements as four instalments have to be paid to the IMF for a total amount of €1.6bn. Moreover, Greece has asked its creditors to compromise on requirements. It becomes tougher for Greece to pay its domestic wages and pensions.

Over the last few years, it has been asked to Greece to reach an unsustainable high primary surplus of about 4.5% of GDP in order to lower its debt/GBP ratio. To achieve this impossible target and comply with requirement on greater austerity, Greece has to increase value added tax, diminish (again) pensions. Needless to say that in case of default (specifically on debt owed to the ECB), Greece will likely have to leave the Eurozone. We anticipate Greece will fail to pay the IMF in June and event which will continue to weigh on the EURUSD. A last minute agreement could provide the country with €7.2bn in remaining assistance. This would only delay the real problem while most likely sparking political turmoil. The question in our mind is only when will Greece leave the Eurozone?

EURUSD - Sharp decline towards 1.09