The possible outcome of a ‘Grexit'

The UK’s inflation rate fell more than economists forecasted in January, dropping to record low of 1.4% as food and fuel prices dropped significantly. This is the lowest level of inflation since the data series commenced in 1989, the Office for National Statistics (ONS) said. The BoE’s projections show inflation averaging 0.12% this quarter and 0.03% from April to June. With wage growth picking up and helping to boost worker's real incomes, it's hoped consumers will soon be back to spending money that then goes into the UK economy. This echoed Mark Carney's comments last week when he discussed how the negative inflation rate will be “temporary” and the UK won’t experience deflation in the economy; this is now looking more so like a prospective scenario. GBP/EUR bounced between a 100 pip range yesterday and closed the London session out towards resistance levels at 1.3464 interbank (IB). The pairing is anxiously waiting for a break either side of its current levels dependant on what agreement the Greeks can draw up with the European Central Bank in the coming weeks. We have a busy morning ahead of us today on the UK calendar with an array of top tier data being released. It will all kick off with the BoE and MPC interest rate decision at 09.30. Investors will be eyeing the latest minutes from the Bank of England after policymakers voted unanimously to keep rates on hold at their last meeting. Martin Weale, one of two hawks who had been voting for a rate rise since last August, later cited concerns about deflation becoming entrenched, furthermore moving on to results in the Claimant Count Sector and the ILO unemployment figures for January which previously read at 2.6%. If any consensus figures are missed or exceeded we might witness some volatility in the currency markets off the back of these releases.

The topic of yesterday was ZEW surveys from the German economy and eurozone as a whole. This reading measures institutional investor sentiment in the regions and the eurozone produced a positive reading of 52.7 benchmarking from last month’s figure of 51.3. Unfortunately, the Germans couldn't mirror a similar result in their economy, producing a disappointing reading of 53.0 from a previous 55.0. Throughout yesterday, there was an Ecofin meeting and the consensus of the day was that the ECB are very unlikely to pull the plug on emergency funding for Greek banks which created more uncertainly as to what is going to happen next. Other than the above fundamentals, there was nothing else to report and it was a quiet day from the European session.

What would happen if Greece exits the eurozone?

Firstly, the government would not be able to repay its debts, which now amount to €320Bn, and the country would run of out of money and have no funds to pay its public sector. Furthermore, the government would have to impose a freeze on cash withdrawals and on people taking money out of the country. The standard of living would drop by 80% within a few weeks of the exit. The domino effect could take place, where nervous depositors in other struggling eurozone countries, such as Spain or Italy, may also move their money to the safety of a German bank account to combat any risks of them leaving the euro, sparking a banking crisis in southern Europe and witnessing something similar in 2008. Many businesses (specifically Greek) would be left insolvent - their debts would be worth more than the value of everything they own and theses companies would face bankruptcy. Finally, the euro could lose serious value in the currency markets, providing some relief for the eurozone by making its exports more competitive in international trade.

Across the Atlantic, there was nothing to report from the US calendar as there was no high impact data releases which resulted in a very range trading session across all major currencies. Yesterday, GBP/USD consistently traded in the 1.53’s IB and touched 1.5402 IB as a daily high. The recent Sterling strength is all fuelled from Mark Carney’s comments last week discussing inflation and interest rates decision in the UK. Throughout the day we have a busier schedule with the release of Producer Price Index information and overnight we FOMC Minutes being released, moving forward to Thursday's Continuing and Initial Jobless claims report.