- As the negotiations between Greece and its creditors turns rather unedifying with rhetoric ramping up, the prospect of Greece being unable to pay its debts is growing. Greek Prime Minister Tsipras is accusing the creditors of pillaging his country, and with finance minister Varoufakis suggesting that there is no current alternative, time could be running out. The bill of around €1.6bn is due to be repaid to the IMF at the end of the month and without agreement on negotiations over pension reforms and VAT, it wold appear that Greece will not be getting its final €7.2bn tranche of bailout money and will not be able to repay its debts.
- There have been some interesting moves on markets in response, with the German Bund yield in decline (ie. Bunds being bought), whilst peripheral Eurozone yields are pushing higher (ie. bonds being sold). This is indicative of a flight to safety in the bond market which suggests that there is increasing concern over Greece now. Volatility indices such as the VIX have also spiked higher as fund managers look to buy downside protection for their portfolios.
- The one area that is not really taking account, are the forex majors which are focusing instead on the upcoming FOMC statement (along with Yellen’s press conference). The majors are subsequently in wait and see mode, even the fall in the Bund yield has been unable to drag the euro drastically lower as it has done previously. Volatility has been elevated in recent weeks and it can be expected to remain so in the wake of the Fed announcement.
- The FOMC meeting on Tuesday and Wednesday will be mulling over the improvement in US economic data in recent weeks. The ISM Manufacturing has broken a sequence of deterioration, core inflation has picked up, Non-farm Payrolls were strong, Average Hourly Earnings are showing early signs of traction, whilst consumer data points (which have been weaker in recent months) such as Retail Sales and Michigan Sentiment have also pulled higher. The Fed will now be looking for confirmation of these improvements and that they are not just a one off. This month is far too early therefore to hike rates, but the interest will be whether Yellen lays any hints at the potential for a September rate hike (also the next time the FOMC lends economic projections). Any hawkish hints could be a significant boon for the dollar on Wednesday evening into Thursday. Furthermore, the US core CPI data is released on Thursday and it would be very interesting to see if this continues to improve
- Commodity markets have been mixed of late (as the dollar has been). The breakdown on the gold price has so far failed to follow through (although any hawkish hints from the Fed are likely to induce another downside leg), whilst the oil price continues to consolidate.
- Equity markets have been under pressure. The deterioration of the Greek negotiations has resulted in reduced risk appetite and indices have been sold-off. There is still little else to focus on (outside of earnings season) and markets are being punished. The DAX and FTSE have fallen to multi-month lows and confirmed breached of these key supports would open the downside. The big risk to this downside view would be that Greece comes to an agreement, which would cause a significant spike higher in equities, especially for the DAX.
- The economic data comes thick and fast this week. Aside from the FOMC there are several other central banks providing monetary policy (SNB and BoJ), whilst the Bank of England meeting minutes will be scoured for hawkish signs as MPC member Ian McCafferty has been engaging an increasingly hawkish rhetoric of late. There is also final inflation for the Eurozone, US CPI and also inflation for Canada too.
- Watch for: US FOMC, US CPI
EUR/USD – The Fed is likely to provide direction but remains positive above $1.1050
- Volatility remains elevated (although there has been an element of consolidation in front of the Fed). After the FOMC meeting expect more of a directional play to emerge. Also the other variable is Greece with news creating daily fluctuations.
- The recent consolidation has settled between the pivot level support around $1.1050 and below the key resistance at $1.1460. Technical indicators have become increasingly rangebound and the pair is now looking for a catalyst to provide direction.
- Watch for: Eurozone CPI, US FOMC, US CPI
GBP/USD – Watch for a lower high below $1.5700
- UK economic data has continued to be mixed. The dip in core CPI had an initial negative impact on Cable but no lasting legacy it would appear. The FOMC will provide the volatility as will the MPC meeting minutes earlier on Wednesday. With US CPI also this week it is likely that there will be a continuation in the elevated volatility.
- The rally has continued and the bulls will be eying the key lower reaction high at $1.5700 now. This is an important marker post as if it is broken then in the least, sterling will be having a neutral outlook against the dollar. Momentum continues to improve too. The key support is now at $1.5450.
- Watch for: BoE Meeting Minutes, US FOMC, US CPI
USD/JPY – Consolidating in range 123.50/124.10 but expect central banks to drive direction
- There has been a lot of volatility in the past week or so as comments from BoJ Governor Kuroda (that the yen had weakened too far) saw a snap lower for the pair. Consolidation has taken over in readiness for the FOMC (which could easily drive direction) but the Bank of Japan gives its monetary plicy update on Friday and it will be interesting if Kuroda was off message. If not then this could induce further retracement of the bull run.
- With momentum indicators corrective and a retracement having begun there could be further pull back towards the 50% Fibonacci level of the bull run a 122.35, whilst the big breakout support is around 122.00. A decisive move back above 124.20 resistance would resume for a retest of the high at 125.85 again.
- Watch for: US FOMC, US CPI, BoJ monetary policy
Gold – Consolidating but the outlook remains bearish
- The strong negative correlation between the dollar and gold is still a factor, so the FOMC and US inflation become extra important this week. The strong Payrolls report induced the breakdown and the current rally looks to be unwinding some of the move, but if the strong data continues then the weakness in gold can be expected to resume. Watch out therefore for the Retail Sales and Michigan Sentiment data to provide a catalyst.
- The rally from the breakdown is still languishing in a 3 week downtrend and with the momentum indicators suggesting rallies are still a chance to sell. A retest of the $1162 low can be expected with further slide towards $1143 in due course. Resistance band is $1192/$1196, with a move above $1205 needed to abort the bearish outlook.
- Watch for: US FOMC, US CPI
Indices – Sentiment driven by Greece but don’t forget the Fed
- S&P 500 – a relative outperformer (at least against the major European indices) but still cannot extricate itself from concerns about Greece. This could be the same in the coming week too with earnings season still not for a couple of weeks. Key support is at 2068.
- DAX Xetra – Volatility remains elevated, although it has so far survived an intraday break to a multi-year low, however the perpetual headlines about Greece (mostly being negative) continues to drive the DAX lower. Selling into strength is still the best idea. Key resistance now at 11,187. The main caveat to the outlook is the resolution of the Greek negotiations which would likely lead to a sharp relief rally.
- FTSE 100 – FTSE 100 is following the DAX lower, volatility is high (but at least it is not as high as the DAX). The FTSE 100 has broken to a multi-month low and as yet despite a rebound for the DAX, the FTSE is holding on to its losses. A close below 6695 would be bearish, but in truth it is just following the DAX currently.
WATCH OUT FOR THIS WEEK
Wednesday 17th June
- UK – Unemployment
- UK – BoE meeting minutes
- Eurozone – Final CPI
- US – FOMC statement (with economic projections + press conference)
- New Zealand – GDP
Thursday 18th June
- Switzerland – SNB Monetary policy + press conference
- UK – Retail Sales
- Eurozone – Targeted LTRO
- US – CPI
- US – Weekly Jobless Claims
Friday 19th June
- Japan – BoJ monetary policy + press conference
- Canada – CPI
Monday 22nd June
- US – Existing Home Sales
Tuesday 23rd June
- China – Flash Manufacturing PMI
- Eurozone – Flash Manufacturing PMI
- UK – Inflation Report Hearings
- US – Durable Goods Orders
- US – Flash Manufacturing PMI
- US – New Home Sales
Wednesday 24th June
- Eurozone – German Ifo Business Climate
- US – GDP (final Q1)
- US – Crude Oil Inventories
Thursday 25th June
- US – Weekly Jobless Claims
Friday 26th June
- Japan – CPI
- Eurozone – German CPI (prelim)
- US – University of Michigan Consumer Sentiment (revised)