In the late hours of Friday night, Greece and the EU signed a deal to extend Greece’s current program for another four months. The increased time frame will allow Greece more breathing space and time to negotiate. It also diminishes the near term risk around the Greek banking system and a possible collapse of funding and liquidity.
What this deal does not do however is provide any further clarity on the longer-term prospects of a healthy Greek economy, nor whether Greece will remain within the euro in the long term. The Tsipras government is expected to submit clear guidelines on the deal to the EU by the close of play today with concessions around the budget surplus – collecting more taxes than spending – expected. Until now Greece has not provided accurate details of how it plans to make the structural reforms it needs outside of oversight from the EU/ECB/IMF troika. Today is their chance.
While this move may buy the Greek banking system and its politicians a bit of breathing space, I doubt that we can say the same for the euro. Spanish political party Podemos remains popular in the polls and given that Syriza has been able to walk away from these early austerity-focused skirmishes with a chance of a new deal will embolden their supporters’ hands in the coming months and in the lead-up to December’s elections. As we highlighted at the beginning of the year, we can expect democracy-led volatility to continue in currency markets this year – Greece’s tribulations were but the first couple of hurdles.
The focus for the single currency will be inflation this week with numbers from Germany, Spain and Italy due over the next five days. I think a similar pull lower in prices can be expected through Europe in the coming weeks. German producer price inflation fell on Friday, increasing fears of a longer run of deflation than officials will be hoping for. Despite its announcement last month, we will not receive the first hit of European Central Bank QE until next month.
The pound remains in fine fettle this morning ahead of what is expected to be a rather quiet week. The only indicator of note over the course of the coming session is the second reading of UK GDP. First readings can be quite wide of the mark and we are looking for a revision higher as December-focused data and readings become more readily available and counted. While the near-term risk for the euro may have dissipated slightly we can easily see GBP/EUR continuing its grind higher.
Dollar positioning and strength will come from Janet Yellen’s testimonies (Tuesday and Wednesday) in front of Congressional representatives. The key will be whether the tone of voice with which Fed members are talking about the jobs market in the US has changed since the previous minutes. Since then we have seen a very strong jobs and wage report from the United States and while inflation numbers are turning lower, if the Fed believes that real wage increases are on the horizon, that will prove to be a major fillip for the greenback.
