Vote secured, time for savings

The Greek PM won the confidence vote yesterday with 155 supporting him (out of 300). That’s exactly in line with expectations but there were risks. Therefore, one black cloud has been removed. Now it’s time for others:

• Greek parliament will hold a vote on another austerity package on June 28^th
• Should the vote go well, EcoFin should confirm the next tranche for Greece on July 3^rd
• Greece should receive the money by July 11^th

If everything goes smooth, the euro might continue to recover vs other majors, especially in light of upcoming interest rate hike. There are risks, obviously, protesters are still pushing Greek politicians and anything may happen.

Technically, the EURUSD continues to recover along a subwave B in a larger corrective ABC pattern. Theoretical target for the wave is 1,4550-1,4620 and breaking 1,47 would negate the whole pattern in favor of something more favorable for the euro

Can the Fed still help markets?

The Fed was there to soothe the markets each time things didn’t go well in the past but regardless of the weaker US data as of late we think that:

• The QE3 is out of question at the moment; notice where the CPI is in comparison to a previous year, and a threat of deflation was a major argument for the QE2, there is no way hawkish members of the Fed allow touching printing press again
• Postponing policy normalization is possible and likely – the market expects the Fed to keep the balance at all time highs until October and remove “extended period” at the end of the year and is likely...
• …unless we see inflation accelerating further which could prompt the hawks to demand sooner exit despite softer patch of growth

To sum things up, investors will look to some dovish remarks from Bernanke during the conference and if there are any, there might be a room (given a relief following a vote in Greece) for some minor rebound. However, one shouldn’t expect anything major from the Fed: the ammo is gone.

The pound overvalued?

The GBPUSD is at the critical long term point – testing a lower limit of a (nearly one year old) wedge formation on the weekly. We have two conflicting influences here: a possible positive one from the EURUSD (following a vote in Greece) and a negative internal one.

As soon as couple of weeks ago markets were busy setting the date of the first hike in the UK yet BoE’s Paul Fisher stunned the markets this week saying that returning to a program of bond purchases is not impossible. Indeed, a glance at the FRA market shows that things do not look well for the pound with the FRA9x12 spread going down by over 35 bps since the beginning of the second quarter against the dollar – which is yet to be reflected on the fx market.

Should the external support be insufficient, the GBPUSD may eventually break down from the wedge paving a path to a larger correction – even to 1,5360. A release of minutes today is one of possible triggers here (the market expects 2-0-7 vote schedule compared to 3-0-6 previously).

Events to watch – The Fed, BoE’s minutes and fuel inventories

The Fed’s statement will be released at 0.30 PM ET (18.30 CET) and will be followed by the conference at an usual 2.15 PM ET (20.15 CET). Bank of England’s minutes will be released at 4.30 ET (10.30 CET) and the data on US fuel inventories will be published at 10.30 ET (16.30 CET).      

Przemysław Kwiecień PhD, Chief Economist

Disclaimer, investment risk warning
X-Trade Brokers Dom Maklerski S.A. does not take responsibility for investment decisions made under the influence of the information published on this website. more