USD fights back

Data released on Friday suggested that Britain’s economy created the largest number of new jobs in nearly a year, and unemployment hit its lowest rate since mid-2008. This caused the pound to break through the psychological level of 1.50 Interbank (IB) against the dollar, however, the pound came under pressure yesterday and slipped below 1.49 IB before bottoming out at 1.4887 IB. This was despite a lack of data from either the UK or the US. Data remains light this week and all eyes will be on Wednesday’s BoE meeting minutes as low inflation and a stronger pound have been a cause of concern for the Bank of England. Markets will look for clarity on these issues and, as the UK election draws nearer, some volatility is expected.

As a Greek exit gathers momentum, the effects can now be seen in the bond market as German 10-year borrowing costs fell toward zero yesterday. German bonds were not the only ones affected as Belgium became the sixth eurozone country to sell five-year bonds at a negative yield. Yesterday saw Athens issue a legislative act requiring public sector entities to transfer idle cash reserves to the country’s central bank in a bid to deal with their cash flow issues. Greek Finance Minister, Yanis Varoufakis, was quoted on Sunday saying that ‘if Athens were to leave the eurozone, there would be an inevitable contagion effect’, meaning that the Greek exit will affect other members. Whether Greece leaves the EU or not remains to be seen, however, the prospect of them missing upcoming payments remains a near certainty. In one of the strongest signals yet of support for Greece to stay in the EU, the ECB’s Vice President, Vitor Constancio, said that ‘we are convinced at the ECB that there will be no Greek exit’, however, with no officials offering any clear guidance, these remain empty words. It is a busy week ahead in the eurozone as we see a host of EU data being released.
This list includes flash PMI, EZ consumer sentiment and German IFO which are all tipped to improve. However, given the fact the EU are in the midst of QE, we might see euro gains limited. Another important date will be the Eurogroup meeting held on the 24th.

With absolutely no data released on Monday or today we will have to wait until Thursday before we see any meaningful data in the form of Unemployment Claims and Flash PMI, followed by Durable Goods orders on Friday. Data and news remained light yesterday, however, an article featuring New York Fed President, William Dudley, was worth mentioning. He confirmed that economic performance will determine when the Federal Reserve will finally raise interest rates from near zero, also adding that he hopes to tighten policy later this year. The influential official went onto explain that inflation remains a worry, adding that the US economy has further to go toward the central bank’s dual goals of full employment and 2% inflation. The Fed is expected to raise interest rates by June at the earliest but more likely in the second half of the year according to leading analysts.