ECB to Hold Rates as Greek Hope and EUR Rise

The European Central Bank (ECB) has surprisingly entered the Greek debt talks along with the International Monetary Fund (IMF), renewing hopes that a deal is close at hand. Inflation data in the eurozone has boosted the EUR against all major currencies. The flash inflation estimate came in at 0.3% beating expectations of 0.2%. The central bank is scheduled to announce its benchmark interest rate decision on June 3. Given the volatility created by the high levels of uncertainty of the Greek debt negotiations, global markets may welcome some stability from the ECB.

The central bank is pleased with the positive results its €1.1 trillion quantitative easing (QE) program has achieved to date. There is no expectation of a rate change announcement next week. Even the expected verbal intervention by ECB President Mario Draghi will probably not be as impactful to the EUR as were the comments by French policymakers on May 19. Benoît Coeuré, a member of the ECB’s executive board, revealed the ECB will front-load its debt purchases to avoid an excess of bond buying during the quiet summer trading days. Christian Noyer, another ECB executive board member, said the ECB could go beyond the QE amounts already announced in order to hit its inflation target. The two statements reassured markets of the commitment from the eurozone’s policymakers to stick with its stimulus program until Europe’s economy shows signs of sustainable growth. Draghi will face questions on those two topics, but his answers will not create further controversy.

The race is on to prevent Greece from defaulting on a €300 million loan repayment on Friday, as Athens and its creditors engage in a frantic game of back and forth proposals. The International Monetary Fund and European institutions are said to be putting on the final touches on their proposal, and Greek Prime Minister Alexis Tsipras has already submitted his. The ever optimistic Tsipras expects his proposal to be accepted. What a remarkable whirlwind of change we’ve witnessed. The verbal combatants have gone from declaring there will be no deals a couple of weeks ago, to today’s proposal exchange. With the impasse seemingly resolved, it has reduced the possibility of a Grexit, and in turn boosted the EUR.

Greenback Volatility to Persist

The U.S. Federal Reserve has also aided the EUR spike as comments from Fed Governor Lael Brainard hit the newswires. The voting member of the Federal Open Market Committee said that the strong USD is delaying the normalization of interest rates in the U.S., and she questioned the temporal effect of the negative factors that crippled U.S. growth in the first quarter of 2015. Brainard’s dovish comments on the lack of signs of an economic bounce-back in the second quarter dragged the USD down versus the EUR. Economic data has been mixed for the U.S. dollar this week. The U.S. posted a strong manufacturing purchasing manager’s index on Monday, but today factory orders were weaker than expected with a –0.4%.

The EUR/USD will continue to ride the optimism of a Greek deal until something gives. Unfortunately, the two sides have not reached a common ground before so it won’t be a total surprise if they only agree to disagree. European manufacturing data on Wednesday will be released to make the case for EUR strength. On the other side of the Atlantic, the first of three employment indicators will be released. The ADP private payrolls report will give the best performing component of the U.S. economy a chance to shine. On Friday the biggest indicator in the forex market, the U.S. nonfarm payrolls (NFP) report produced by the Bureau of Labor Statistics, will grab investors’ attention worldwide. The fact that both the NFP and the Greek IMF payment deadline come on the same day will further raise uncertainty, and given the data dependant markets due to central bank policies, it will make for a volatile end of the week.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza