Earlier this week Andreas Dombret of the Bundesbank warned that the situation in Greece was critical and that, in rather dramatic terms, it was 5 minutes to midnight for Greek banks. As Greece’s Friday payment deadline approaches and the so called clock ticks ever so closer to the top of the metaphorical hour, financial markets continue to remain remarkably sanguine about the prospect of a possible default. It does appear that finally after weeks and months of wrangling that the EU creditors/institutions may have given some ground on the matter of the Greek budget surplus in the first year, of 1%, an improvement on the previous figure of around 3%, even if the question of debt sustainability continues to remain unaddressed. Whether this is enough to secure further progress remains very much up in the air given the lukewarm response given to Greece’s own proposals which were submitted earlier this week. Given last night’s talks between Greek PM Tsipras and Jean Claude Juncker, the hope remains that enough common ground can be found to be able to see Friday’s €300m payment to the IMF either paid on time or at least deferred without too much fuss and rolled up into the remaining repayments later this month, in the almost certain probability that a deal can’t be concluded this week. Greek PM Tsipras’ comments last night that a deal was close were encouraging, but we’ve been here before so probably better to not set the bar too high. While this may well happen, the divide between Greece and the creditors still remains quite wide and given the tone of some of the comments yesterday from policymakers like German finance minister Wolfgang Schaueble and the head of the Eurogroup Jeroen Dijsselbloem, neither of them seems in too much of a mood to give too much ground, irrespective of any political consensus. Both European and US markets finished higher yesterday, as investors digested the prospect of potentially lower rates for longer, after the OECD downgraded its global growth forecasts for 2015, with the US and China the main causes for concern. The OECD did upgrade its prospects for Europe though. With US forecasts slashed from 3.1% to 2%, and yesterday’s US economic data giving no indications of a significantly strong recovery, the US dollar started to come under pressure, despite US bond yields rising sharply. A weaker than expected ISM Non-Manufacturing survey for May did nothing to feed into a narrative of a potential September rate rise, and if anything reinforced the concerns articulated the day before by Federal Reserve board member and FOMC voting member Lael Brainard, when she suggested that there was a risk that the recent poor economic performance could well last a little longer than anticipated. These concerns about weak data and prices were reiterated once again by Charles Evans of the Chicago Fed when, in comments made last night, he said that even early 2016 might be too soon to raise rates, though the contents of the Federal Reserve’s Beige Book of economic conditions continued to remain fairly upbeat, with concerns about the strength of the US dollar still a potential drag. When ECB President Mario Draghi upgraded the ECB’s inflation forecast for 2015 and stated that markets would have to get used to recent increased volatility in the bond market, yields started to push sharply higher across Europe. This almost ambivalent attitude to recent volatility contrasted somewhat with comments made by ECB member Benoit Coeure last month which traders had interpreted as ECB concern about increased volatility in European bond markets. The resultant surge higher in German bund yields to their highest levels this year, pushed the euro higher, as spread differentials moved sharply in the single currency’s favour relative to the US dollar, and to their narrowest levels for months. With economic data holding up well and the ECB apparently determined to see its QE program through to completion, equity markets also pushed higher. The pound came under pressure yesterday after the latest services PMI numbers slid back considerably more than expected in May, dropping from 59.5 to 56.5, casting doubt on the resilience of the UK economy as we head into Q2. While the number is still relatively strong in the context of economic expansion, and is widely expected to be a temporary setback, the sharper than expected slowdown raises concerns that the rebound in Q2 which had been widely expected after a disappointing Q1, may not be as robust as first thought. With inflationary pressures still subdued after BRC shop prices slid 1.9% in the year to May, it seems likely that the Bank of England will be in any hurry to push interest rates up in the short to medium term. As such today’s Bank of England rate decision is set to be a fairly straightforward “as you were, nothing to see here” decision with the status quo of “no change” maintained for the 75th month in a row. EURUSD – the euro continued to trade higher yesterday despite a brief dip to 1.1075, breaking above the 1.1220 area to push on towards the May highs at 1.1480. We may get a drift back towards 1.1130 first but while we remain above 1.1050 the bias remains for a continued move higher. GBPUSD – the pound continues to hold up but needs to push beyond 1.5400 to target the 200 day MA at 1.5535. Support remains back near the 50 and 100 day MA between the 1.5155/65. EURGBP – the euro continued to gain ground yesterday pushing through the 0.7300 area on the way towards the 0.7380 level. Support now comes in at the 0.7300 area and below that at the 0.7230 area. USDJPY – yesterday’s tap of 125.00 has seen the US dollar slip back and we could see a bit of a pullback having seen a daily reversal candle. A fall below 123.60 could well signal a fall back towards the 122.00 level. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person
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