Euro Looks For Direction as Concerns Over Greece Wane

EUR/USD

The Euro has traded lower on the day despite growing confidence that Greece will be able to correct their deficit issues and measures are being discussed to prevent a repeat amongst other member nations. A European monetary fund is being proposed by the E.C. to act as a lender of last resort, but opposition is already mounting against the proposal which is giving it little weight. A pull back in risk appetite has helped drag the EUR/USD lower as the pair continues to see a 42% correlation with equity markets. Meanwhile, the deficit issues in Europe have seen interest rate expectations grow in influence to 28% from 8% a week ago. Slow growth, subdued inflation and the credit issues pushed out the horizon for a rate hike which added to the bearish Euro sentiment. The brighter outlook for Greece helped the Euro and yield expectations regain their footing which has reinforced the relationship between the two.

ECB Interest Rate Expectations

Overnight Index Swaps turned higher and are now pricing in 63 bps of rate hikes over the next twelve months. This is sharply higher from 49.8 on February 26th, when concerns over Greece’s troubles reached their peak. An improvement in January German industrial production by 0.6% along with a 4.3% gain in German factory orders is evidence that growth is continuing in Europe’s largest economy. The upcoming German trade balance and EZ industrial production are the only upcoming releases that have any potential to impact the outlook for yields. To discuss this and trading ideas join the EUR/USD forum.

FOMC Interest Rate Expectations

Fed funds futures continue to point toward rates remaining on hold for an extended period of time with a zero percent chance for a hike at the FOMC’s upcoming meeting. The stronger than expected NFP report was only able to raise the chance of tightening beginning in April to 5.8% from 2.9%. Looking out to August, markets are still leaning toward the central bank leaving monetary policy unchanged with a 31.5% chance of a rate hike. Advance retail sales for February has the most potential to alter expectations, the early forecast for a 0.1% decline in consumption may only serve to push out the horizon for future tightening.

Risk

Stock markets took a breather today after Friday’s rally on the back of the strong labor report which has the Dow threatening a rising trendline. Depending from where you draw the upper bound of the current triangle formation, we may have seen a break above on Friday (which loses weight with today’s subdued price action) or it is currently being threatened and a retracement is still a possibility. U.S. Advance retail sales is the only major event risk on the week which could lead to further consolidation until Friday’s release. Discuss this and other fundamental data join the Economics Forum.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com