One of the biggest weeks for the markets this year got off to a positive start on Monday but futures suggests these gains will be pared shortly after the open this morning, suggesting investors remain quite cautious.
If investors weren’t already worried enough about whether Greece can come to an agreement with its creditors before it runs out of money, they now have to contend with the closest fought U.K. election in years and a very important U.S. jobs report. This week could be hugely important for the markets.
Greek negotiations are continuing this week and both sides will be hoping that a deal can be reached by the eurogroup meeting on 11 May, with Greece having to repay €763 million in loans to the International Monetary Fund a day later. It’s not clear whether Greece would be able to make that payment without the €7.2 billion loan being secured first but comments from Greek officials recently suggest they wouldn’t.
That means a deal really must be close at the very least by Friday or we enter the weekend with an enormous amount of uncertainty hanging over the markets. We’ve seen plenty of times throughout the eurozone crisis what this can do to markets when they reopen and it’s far from ideal.
The U.K. election uncertainty isn’t going to be helping matters early in the week, with the polls still showing both major parties – Conservatives and Labour – as being neck and neck making an overall majority extremely unlikely. People go to the polls on Thursday and until we get some idea of what the next government will look like, the pound may remain under a little bit of pressure.
Sterling has been out of favour over the last few trading sessions, which is not that unusual as we near such an uncertain election. The sell-off hasn’t been quite as aggressive as many have previously anticipated which just goes to show that interest rates have a far greater impact on currency markets than political events such as this.
Even though both sides are seen representing very different visions for the U.K. economy, traders don’t really see the result making too great a difference to the outlook for the pound. I’m sure we’ll see much more of an impact as we approach the E.U. referendum, should David Cameron remain in number 10.
The European session is looking a little quieter on the data front today, with the U.K. construction PMI and Spanish unemployment the only notable releases. We’ll also get the latest E.U. economic forecasts from the European Commission later on this morning.
The Reserve Bank of Australia cut interest rates to record lows of 2% this morning, a move that was largely anticipated by the markets. The moves that followed in AUD/USD were a typical example of traders selling the rumour and buying the news as the pair tumbled almost 1% before recovering to trade up more than half a percentage point shortly after.
This has also been attributed to different interpretations of the RBA statement by traders, with the initial belief being that it was dovish as the RBA claimed there was capacity for further easing as it sees spare capacity in the economy for some time. However, this was then followed by the more hawkish claim that the inflation outlook is consistent with its target over the coming 1-2 years. Overall this makes the statement quite neutral and explains much of the moves following the decision.