The Greek novel

It’s incredible how the things are on and off with Greece, hopes for the reforms and fears of the default. Yesterday we reached a point where market were in euphoria over a news (or rather a speculation) that the Greek government may collapse (and thus not go with the referendum). While it seems nearly certain that the referendum will not take place (and thus the Greeks won’t get a chance of pushing the country off the cliff, probably pulling other southern economies with it) the market’s reaction (especially on equities) might be too optimistic again. First of all, those recent developments prove that you can expect anything but a smooth implementation of reforms in Greece, even if the government receives another confidence vote today (which is not certain). Secondly, despite a presence of the central bank, credit premiums of Italy, Belgium and France are near euro-time highs – higher than ahead of the EU summit. 

ECB cut interest rates

Mario Draghi chose dragon’s entrance as the ECB lowered interested rates yesterday, reversing course just four months after the hike. We were among the surprised majority not because of the move itself but purely because of the timing. We simply thought – and that was the market consensus – that the new president will choose to let the dust settle before taking action, especially as this action comes against a rhetoric of his predecessor.  Nevertheless we think the move is welcome and fully justified by deteriorating conditions in the euro zone. It was priced in by the interest rate market anyway and investors expect another cut within the next 6-7 months. Should the activity contract at the recent pace, we would expect even 2 cuts within that time span.

The monetary policy prospects continue to pose a downside risk for the EURUSD. In the short term, however, the pair is stuck in an upward sloping consolidation following a large decline that occurred at the beginning of this week. This consolidation might be tracked on H1 and H4 intervals and an outbreak may determine a short-term direction.

Przemysław Kwiecień PhD, Chief Economist

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