Forex markets continue to search for direction this week despite Greek agreement

Macro Outlook

Greece has finally come to an agreement to extend the €172bn bailout that now keeps the country solvent for another four months. However, after weeks of posturing it seems as though the anti-austerity Syriza government have backed down to pressure from Eurozone heavyweights such as Germany. On the surface, it is difficult to see whether Syriza has achieved anything and it will be interesting to see if there is any backlash at home in Greece. They are now required to lay out detailed plans of an economic reform proposal that would satisfy the old troika (now simply known as the “institutions”) that the necessary measures are taking place, with tax evasion and corruption apparently key. If the plans are accepted Greece has prevented a default on its debt that would have hastened a “Grexit”. The question remains, what has been achieved? An 11th hour fudging agreement, a trick that the Eurozone certainly has form in, has taken place, but in four months time the whole process will simply be repeated. It is plain to see that Greece cannot continue to play the game with the rules laid out as they are. Despite running a primary budget surplus, debt repayments are crippling and until there is a wholesale reform of the debt profiling it will be just like groundhog day, over and over again.

Must watch for: US Inflation - CPI

Impact: US inflation is falling. Last month saw CPI fall to its lowest level since October 2009 and it is expected to fall even harder this month to -0.1%. The Fed minutes suggested that the FOMC was perhaps slightly more dovish than the (slightly hawkish) original statement had suggested. A sharp decline in CPI is not going help the hawks (and there are not too many in 2015) win the argument. The market is still interested in seeing wage growth and an improving labor market but the Fed would still be more comfortable to see upside surprises in CPI before it begins to tighten.

Foreign Exchange

The Dollar Index has been consolidating now for a few weeks. This is still likely to be just a consolidation within the bull trend (and remains my base scenario), but that does not mean there is not room for a dollar correction still. However the Dollar Index which threatened to pull clear below its 21 day moving average (something that it has not done for several months and arguably since the dollar bull run began). The consolidation has been driven by the uncertainty created form the Eurogroup negotiations with Greece. This is one of the reasons why Cable has been outperforming EUR/USD, and it will be interesting to see if the euro now begins to reverse this with the 4 months extension to the bailout now agreed. However, the Bank of England remains the only western central bank that is even remotely close to the Federal Reserve in the market’s expectations of a rate hike and a look at the 10 year yields of both Treasuries and Gilts suggest that this should be supportive for Cable (to a certain extent) if and when the dollar goes on a tear again.

WATCH FOR: A resolution of the Greece/Eurogroup wranglings will help to end the consolidation in the markets. This week we get a raft of key inflation data, with CPI for the Eurozone (final), US, Japan and also Germany (which will give a guide to the next Eurozone data). UK and US GDP data will also be key.

Indices

Equity markets have been stymied a bit in recent days due to the on-going risk of the uncertainty surrounding the talks between Greece and the Eurogroup. Under these circumstances with indices at or around key resistance levels (some around all time highs), perhaps it is natural that investors have not wanted to take a position. However, signs on Friday were coming that equity investors were ready to remove the shackles and believe that an agreement was ready to be made. With earnings season now in its dotage, markets are looking towards the key macro events to drive sentiment. Greece and the conflict in eastern Ukraine have been high on the list of concerns, but it seems as though with a supposedly tactical retreat by the Ukrainian army from front line positions, the immediate tensions have reduced. That I not to say that there is not still an issue that will continue to bubble under the surface, however for now tensions have receded slightly. The impact of a rebound in the price of oil and base metals on the large weighted oil majors and natural resources of the FTSE 100 (a combined weight of c. 28%) has been a reason behind stagger higher for the Footsie into multi-year highs.

WATCH FOR: Resolving the Greece/Eurogroup saga will help to free investor sentiment again. Wall Street will run off Consumer Confidence, whilst falling inflation from the low oil price remains a boost for the US consumer and could give the FOMC an excuse to hold rates lower for longer and also boost equities.

Other Assets: Commodities & Bonds

Every week we see US oil inventory supplies coming in above market anticipations and every week the oil price suffers. This week the EIA US oil stocks rose by 7.7m barrels to 425m (versus a 3.7m expected). The oil supplies remain high, but the Baker Hughes rig count is falling at a steady rate which is supportive of oil prices. Although gold and silver spiked higher on slightly dovish FOMC minutes, their prices remain under pressure. Copper price continues to show signs of bottoming, as it continues to move on China economic data disappoint that drives expectation of further PBOC easing.

Debt yields remain extremely interesting and are now looking to be in tune with market expectations of central bank monetary policy (or at least in terms of major sovereigns). The yield of the US 10 year Treasury and UK 10 year Gilt have been rising now throughout February reflecting the improvement in US and UK economic data. Markets are factoring in the moves towards tightening. The Greek yield curve remains sharply inverted, with the 5 year trading at 14.3% and the 10 year at 9.9%. Expect these to be sharply volatile this week.

WATCH FOR: Sovereign Eurozone yields could react higher if the Eurogroup fails to compromise with Greece. US Treasury yields will move on the US CPI data. The EIA inventories will impact on oil.