Waiting for the next shoe to drop

• Greek Syriza party said to be fracturing after bailout extension granted
  

• Election pains not being felt by sterling yet but options prices increasing

• Yellen's lack of rhetoric pushes USD focus to next week's payrolls announcement

• UK GDP and US inflation measures due through the session

Good morning,

It’s nice to finally get some news flow running through these markets following what has been a rather slow week so far. Everyone seems to be waiting for that next shoe to drop in markets. In Europe, this is manifesting itself as fears that the ruling party in Greece may already be starting to fracture. Syriza is a coalition of leftist parties and some of those constituent members, according to reports yesterday, are furious at Tsipras and Varoufakis for continuing the current bailout program for four months whilst negotiations remain ongoing.

In the US, the lack of strong rhetoric on the part of Fed Chair Janet Yellen has left investors in a bit of a state of limbo. While I would say that the majority of economists and analysts are not looking for the Federal Reserve to raise interest rates in June but a small and vocal group do. Without an assertion either way, the market will remain split until next Friday’s payrolls report hopefully clarifies things.

For sterling, the obvious event looming on the horizon is the May 7th general election. While campaigns may have gone quiet as Westminster deals with another round of “cash for questions”, the desire to protect against further falls in the value of the pound has not. As we pointed out in Monday’s Weekly Update, contracts to protect oneself against falls in the value of the pound have not been in such high demand for three years. The most common question that I now get asked on a daily basis is when will the election start to have an effect on the pound?

Looking back at 2010, we can see that volatility in sterling pairs picked up into the election but only really spiked as we came into the last week of polling, and a hung parliament looked like a possibility. Once the first exit polls showed a hung parliament, the pound collapsed.

I believe that the moves this year will be a lot more gradual as investors remember the past and that sterling falls cannot be too far around the corner as a result. Of course, the overall result of the election remains very much up in the air although some market participants have been happy to square increased economic prosperity in the UK for increasing opinion poll backing for the Conservatives.

Today’s GDP report is a case in point. I am looking for the release to be revised higher to 0.6% on the quarter against 0.5% previously and for sterling to rally as a result. My optimism stems from the pickup that we saw in economic news from the UK in December that will increasingly be counted in today’s release of GDP and not available at the time of the first iteration. The release is due at 09.30 and will keep sterling on the front foot through the session.

There are a fair few reports from the Eurozone through the course of the session as well. The main focus will be German unemployment at 08.55 which is expected to show a 10,000 person decrease in unemployment with the overall unemployment rate remaining at 6.5%. This afternoon’s CPI report from the US is also important given its relevance to the overall rate rise debate. Once again - and given the opacity that the falls in oil and food prices are having on inflation measures - we will be focusing on the ‘core’ element. Should these readouts - that do not include oil or food measures - remain strong, then that is cause for optimism and will eliminate near-term fears of outright deflation.

Have a great day.