Fed on course for interest rate hike following Greek debt deal
14/Jul/2015 • Currency Updates•
The Pound appreciated by over one percent versus the single currency on Monday, its biggest gain in almost two months, following the news that the Greek government had reached an agreement with Eurozone creditors over a debt deal. Sterling ended the London session 0.2% lower versus the Dollar.
With little in the way of economic announcements in Britain, the UK currency was mostly driven by monetary policy expectations elsewhere, predominantly Euro weakness caused by an imminent rate hike in the US. However, we did see the release of the latest credit conditions survey from the Bank of England for the second quarter. The report suggested that applications for home loans had taken off since May’s comfortable Conservative General Election victory, with households borrowing an additional £2.1 billion in secured loans in May compared with just £1.7 billion in April. Meanwhile, demand for credit from SME’s surged in the three months to June by its fastest rate since 2013, a further reflection of our long term view that the UK economy is on the right track.
Inflation and labour data will be the focus in the UK today when announced at 9.30am. A recovery in the core consumer prices, similar to that we saw in the latest retail sales, could support expectations for a sooner than expected rate hike by the Bank of England.
Despite the relief in Europe given the deal in Greece, the Euro depreciated against its major peers, fuelled by speculation that an interest rate hike by the Federal Reserve would weigh on the single currency. The Euro ended 1.2% lower versus the Dollar.
Following Europe’s longest ever summit, details of discussions began to emerge yesterday. It remains a crucial few days for the country, with the deal conditional on Greece passing agreed reforms by Wednesday. These include unpopular measures to streamline pensions, increases taxes, and liberalise the labour marker. However, the agreement doesn’t look like a complete capitulation by Alexis Tsipras. He got an explicit commitment for debt relief after the first positive review of the programme. In a nod to German politics, it looks like the relief will come in the form of rescheduled payments rather than a percentage reduction in the amount repaid.
There’s a host of economic releases in the Eurozone throughout this morning’s trading. Inflation figures in Germany, Italy, and Spain will be followed by the ZEW economic sentiment indices and Eurozone wide industrial production figures at 10am UK time.
The US Dollar was given a major boost, following the announcement of a deal in Greece yesterday morning, with the currency appreciating against the majority of its G10 and emerging market counterparts. The US Dollar index ended 1% higher for the day.
With a Greek exit from the Eurozone now seemingly averted, attention among traders in the US turned to interest rates. Traders appeared to adopt our view that a Greek deal now paves the way for an interest rate hike by the Federal Reserve in September, especially given comments from central bank Chair Janet Yellen last Friday, which suggested rates would be increased this year. A key date in the dairies for traders will be this Wednesday, as Janet Yellen testifies at the semiannual monetary policy report to the Congress. Yellen will likely touch on Greece and could provide further indication that the US economy is close to its first interest rate hike since 2006. However, clear signals are unlikely for fear of premature market moves, especially considering there are still two key payroll and retail reports before the September meeting.
All attention in the domestic US economy today will be on the latest retail sales numbers from the US Census Bureau.
Rest of the world
Away from G3 currencies; the Kenyan Shilling slipped to a fresh three-and-a-half year low, hurt by demand for the US Dollar, the Russian Ruble fell on oil prices, while data suggests the Swiss National Bank has continued to intervene in the FX market to weaken the Franc.