Euro See Relationship With Risk Wane As Greece Issues Continue

EUR/USD

The Euro regained its footing as post Goldman Sachs fraud case fears have started to subside and markets are becoming numb to news regarding Greece. The debt ridden country saw its yields reach its highest level since 1998 relative to the German Bund which helped generate earlier weakness but failed to keep the single currency down. Interest rate expectations for the region continue to trend lower as the ECB may be reluctant to begin tightening until the Greek issue is resolved. The outlook for yields has grown in importance in determining price action of the EUR/USD with their correlation at 27% versus 19% a month ago. This has led to a diminishing role for risk trends which have seen their influence on direction weaken to 34% from 43% a week ago.

ECB Interest Rate Expectations

The European Central Bank said it will gradually phase out emergency lending measures and act in a “timely” and “appropriate” manner if price risks emerge. Policy makers also noted the improving prospects for world trade and euro-area exports in statements today. The comments could be viewed as hawkish as it is the first time that the central bank has mentioned taking action in regard to higher inflation. However, markets are still focused on the Greek crisis as Overnight Index Swaps went from pricing in 64.4 bps of tightening over the next twelve months to 54.6 today as Greek yields continue to rise. Upcoming German Zew and IFO readings are expected to show improving business and investor confidence which could raise the outlook for growth, yields and generate Euro support. Discuss this and trading ideas join the EUR/USD forum.

FOMC Interest Rate Expectations

Fed fund futures continue to point toward the central bank remaining on hold until at least November with markets only pricing in a 28% chance of a rate hike in September. Upcoming inflation, housing and employment data may do little to shake that view. Producer prices are forecasted to have risen to 6.0% from 4.4% which could have the greatest impact as rising prices would fuel concerns over future inflation. The weekly initial jobless claims data isn’t as impactful due to its volatility but the importance of the labor market gives it additional weight and increases its potential to create volatility.

Risk

Stocks are attempting to erased Friday’s Goldman inflicted losses as positive earnings from Citigroup helped eases concerns over the banking sector. It was also revealed that the vote from the SEC to take action against the investment bank wasn’t unanimous and along party lines with Democrats outnumbering Republicans three to two. The splintered committee detracts from the case and may aide the bank in its defense. The Dow was turned away by trend line resistance on Thursday near 11,155 which may prove to be a formidable level and could spell additional downside risks. Discuss this and other fundamental data in the Economics Forum.

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