The meeting of European Finance Ministers held in Luxembourg on Thursday, June 18 failed to make further inroads towards unlocking the Greek agreement negotiations. The European Central Bank has increased the amount of emergency funds to Greek Banks that have been hit by massive withdrawals as uncertainty about the fate of the country’s finances. The Eurogroup will try again to bring the two sides together on a Monday, June 22 emergency meeting. The forex market will be awaiting the outcome with the hope an agreement can finally be reached.
As talks broke down in Luxembourg thousands of Greek protesters gathered outside parliament in Athens on Thursday. The main message was that the government should avoid default and remain within the Eurozone, which entails taking the existing deal. The protest was heavily attended by members of the opposition party . A rally the day before that supported Prime Minister Alexis Tsipras’ decision to stick to their negotiation efforts with similar if not higher numbers. The size of both protests was smaller than in previous demonstrations and shocking given the fate of Greece hangs in a balance as the IMF repayment deadline approaches.
The USD was rocked by the Federal Open Market Committee (FOMC) statement that had a dovish undertone regarding the timing of impending higher interest rates. The US Federal Reserve is sticking to the plan to raise the benchmark interest rate before the end of the year, yet the pace and forecasts of where policy members see the rate in the future has been downgraded. September continues to be the key FOMC meeting where the much awaited first rate hike will be announced, that is if the U.S. economy complies.
The U.S. economy had mixed data release during the week. Inflation came in under expectation at 0.4 percent after a 0.5 percent growth was expected. Unemployment claims continue to impress with a decline of 12,000 new claims from the previous week. The Philadelphia Fed Manufacturing Index surprised with a 15.2 reading crushing the expected 8.1. The recovery in the Philadelphia region increased from a reading of 6.7 in May boosting the dollar with positive news on the manufacturing front that has been affected by a strong currency.
From the currency moves after the FOMC it was clear that while Greece might grab more headlines it is the U.S. economy and the Fed that are moving the markets. The lack of commitment from the U.S. central bank to a date is not seen as a show of force. The September meeting is the most likely candidate for the announcement of higher benchmark interest rates of the world, thus marking the end of low rates era, at least in the U.S.
There are rising doubts about what would happen after the first rise. Originally the market had priced in a strong pace of rate hikes, that now appears unlikely given the mixed signals thrown by the economy. The abandoned “forward guidance” and other signalling devices used by central banks to avoid unwanted volatility have left a huge void to fill. Uncertainty and volatility have filled that void as the Fed is putting the timing on the decision on the pure indicators, rather than the analysis and forecast of said economic figures. This is the environment that makes the Greek situation so precarious as there is little needed to rock the boat.
The recently elected Greek government is using that to their advantage, or at least they are trying to as it could all end up with unwanted consequences for all party. The Greek accident rather than a planned Grexit. Greek PM Alexis Tsipras and his inner circle are faced with two worst case scenarios. Accept the deal as is, resulting in unhappy citizens as essential services are cut to achieve unattainable targets set by bureaucrats or refuse the deal, face default and rebuilding of a nation’s economy. Its no wonder Tsipras and Varoufakis are pushing for a third option that does not currently exist. The hardest part has been convincing the European Union and the IMF to go along with this third option that while not the worst possible outcome for creditors, does not rank as high as just going along with the original agreement.