The emergency Eurogroup meeting ended without any big announcements, but there was enough to give the markets hope of a deal later this week.
European policymakers reacted positively to the proposal offered up by Greek Prime Minister Alexis Tsipras over the weekend. The proposal does not include pension cuts or reductions in public-sector wages, but it does include proposed tax increases on the wealthy, businesses, and a modest value-added tax hike on some items, all of which has been a point of contention. That the proposal was not rejected immediately as were previous proposals is a good sign that a deal could be close.
European Commission President Jean-Claude Juncker said that the group will work hard to hammer out the details and get a deal this week. Eurogroup Chairman Jeroen Dijsselbloem said the Greek proposals were a basis to really start the talks.
France Recovering as Germany Hits a Lull
The market is expecting French manufacturing surprises to continue and has forecast a 50.1 reading of the preliminary data to be released on June 23 at 3:00 a.m. EDT. A reading above 50 signifies expansion, and it would be the first time since April of last year that the French purchasing managers would show optimism about the state of the manufacturing industry. Last month’s figures beat expectations by posting a 49.3 reading when 48.6 was expected. The rise in private sector output grew for the fourth month in a row and the next challenge will be to break above 50 to give credibility to the recovery of French manufacturers.
Meanwhile, the German flash manufacturing purchasing managers’ index (PMI) for the same period fell slightly below expectations though still at an expansionary 51.4. Analysts are now reducing their forecasts to 51.5 after the rate of growth is cooling down for the Europe’s economic engine. Weaker demand and rising costs have been given as likely factors for the slowdown.
BoE Governor to Give Inflation Report to Parliament
The pound received a boost from inflation numbers in the United Kingdom released on June 16 as the price of goods and services rose by 0.1%. The fear that the deflation experienced last month was to be permanent was broken and it validates Bank of England (BoE) Governor Mark Carney’s perspective who deemed it transitory. He is sure to follow on this line of thinking when he faces Parliament on June 23 to face queries on the BoE’s Inflation Report.
While the U.K. narrowly avoided deflation, the risk remains of falling behind yet again as inflation is not expected to pick up and approach the central bank’s target until 2016 as per Carney. Inflation will continue at subdued levels, which will keep rates low in the U.K. until the small rebound in inflation proves to be part of an upward trend in consumer prices that would justify a rate hike.
Cable had thrived during the worst of the Greek turmoil. Strong U.K. retail sales and wage growth after dodging the deflation trap had boosted the GBP/USD to a seven-month high. The pound gained 2.05% during last week against the USD and 1.28 versus the EUR. GBP/USD had a weekly high of 1.5928, while EUR/GBP reached 0.7251.
Though the Eurogroup meeting did not result in a final agreement between Greece and its creditors, the optimism resulting from the talks reversed the fate of the GBP/USD which was on track to lose 0.30%. At present, the currency pair is trading near the lows of the day at 1.5810. Carney’s testimony tomorrow before the Treasury Committee could influence how sterling continues to perform.