The UK is not immune to the backlash of a 'Grexit'

The pound rallied to a fresh 7 ½ year high versus the euro in early trading yesterday as a result of the on-going Greek debacle, but ended the session close to flat on the day as the euro fought back. The pound traded within 4 cent range against the euro, but within a much tighter 1 cent range versus the US dollar.

Economic data from the UK was fairly light yesterday. However, what we did see and hear did its best to limit the pound's advances. George Osborne told the Commons that a Greek exit from the eurozone would have a big impact on the stability of the financial system and represented “one of the biggest external risks to the UK”. It has emerged that British tax payers could face a bill, potentially totalling hundreds of millions of pounds, if Greece does crash out of the euro.

Also speaking yesterday the Bank of England chief economist, Andrew Haldane, revealed that he still believes the next move for UK interest rates could be up or down. He was dismissive of the strong earnings growth from April and also stated that hiking rates too early will increase the chance of a recession. Haldane is the lone dove within the committee, leaning toward policy easing rather than tightening.

Lastly, in the form of data releases, mortgage approvals printed a lower than expected number of 64k versus an expectation of 68k which could be seen as negative for the pound as it represents a slowdown in the housing market.

Today holds the initial outcome to this everlasting Greek saga, marking the deadline for Greece to pay its debt of €1.6 billion euros to the IMF. Unless EU prime ministers are able to persuade the IMF to extend its bail out terms for Greece they could face an official default. The Greek population will face a referendum next Sunday, deciding whether to accept their creditor’s terms. Tsipras has opposed this referendum and conflicted with other EU members urging the Greek people to vote ‘no’.

Monday morning saw Sterling jump over 1.3% against the euro in an instant reaction from news over the weekend that banks in Greece would not be open. However, these levels did not last long as the market corrected across the day falling back to the closing levels on Friday.

Yesterday also reported German Prelim CPI m/m at -0.1%. Whilst not having an effect on the market due to the scale of other events, these figures are worth watching in the coming months. The concept of European deflation has been bubbling under the surface for the last few weeks and could have a significant effect on the euro if it spreads.

Looking ahead, today has a small host of European data including core CPI (flash estimate) and unemployment figures.

Yesterday saw the release of US Pending Home Sales (M/M) which printed 0.9% higher at 112.6. This is the highest level recorded since April 2006, indicating a strong US housing market and broader economic outlook. Despite this, the dollar failed to gain any traction against its major counterparts, ending the European session 0.2% lower against the euro and 0.4% lower against the pound.

In the midst of economic turmoil in Greece, volatility has been far higher with EUR/USD and GBP/USD moving 3% and 1% respectively in just over 24 hours. People may be surprised to hear that EUR/USD opens near 1.12 interbank (IB) today despite touching 1.0950 IB yesterday morning. GBP/USD opens the London session around 1.57 IB.

Today we have the release of the Chicago PMI at 14:45, as well as the CB Consumer Confidence Index at 15:00. The latter in particular will be watched closely by the Federal Reserve as they assess the potential of a US rate hike in September. Forecasters expect the number to print at 97.3, up significantly from 95.4 last month. How the dollar trades this week will depend on whether the market cares more about growth or safety. Watch out for any significant news out of Greece, as any default may cause dollar strength caused by a flight to safe haven assets like the dollar.