As the time for a Greek debt deal ticks down and the US Federal Reserve inches closer to higher interest rates, the risks for the EURUSD pair remain clearly skewed to the bottom despite several measures that could prove optimistic for the pair. Resurgent European growth and the revival of inflation across the Euro Area have been very positive developments for the European Central Bank as it tries to restore upside economic momentum. The tailwinds of the weaker Euro have helped spur the fastest growth in years in certain core sovereign states, but many factors remain outside the control of the Central Bank as it seeks to ensure sustainable growth through zero and negative interest rate policies coupled with asset purchases. The importance of this week’s developments should not be lost on investors as the potential for a major policy shift could signal risks ahead for major currencies.
The Fundamental Take
News out from Greece over the weekend show that the country is softening its negotiating position to a degree, but the main points of contention remain. The sticky issues for the Greeks are increasing the VAT rate and decreasing pension obligations. As a percentage, pension obligations are among the highest Europe when listed as a percentage of GDP. This has caused concern amongst the leadership of Euro Area finance ministers that look upon the situation as untenable. However, the idea of cutting pension from a Greek leadership perspective is a non-starter like raising the value-added tax. The commonly used phrase “squeezing blood from a stone” would best define the results of adding more taxation to an economy that is already buckling. Thousands of jobs and hundreds of businesses are closing their doors every month in the longsuffering nation as the leadership tries to negotiate an easing of the hardship and ability to implement pro-growth measures.
Citizens across the European Union will be carefully watching how events unfold as the Greeks remain steadfast in their determination to lift the crippling economic measures. Anti-austerity and anti-Euro movements are gaining traction and momentum, meaning any mistakes on the part of European creditors might in fact embolden the opposition to many incumbent governments. At this point however, many sovereigns are preparing for the potential of a Greek default as evidenced by the German’s drawing up plans should the nation fail and Macedonia preventing withdrawals from Greek banking branches in an effort to ring-fence the economy from any unintended consequences of a banking crisis. Capital controls and bail-ins are likely around the corner if politicians fail to close a deal for more aid before the end of the month IMF repayments.Â
