GBP/EUR hits 1.41 this morning

June 24th: Highlights

• GBP/EUR hit 1.41
• USD strengthens ahead of Q1 GDP report
• Eurozone throws Greece a lifeline
• Sterling benefits from debate of Q4 interest rate rise
• China issues world’s first four-currency bond

Sterling Comment

GBP/EUR crossed the 1.41 mark yesterday. The short term outlook for the pair will be heavily dependent on how the Greece saga plays out, but some analysts are forecasting a gradual rise towards 1.45. We’re not holding our breath – rates haven’t been there since Sept 2007.

Some major UK banks are getting in on the rate-game, predicting interest rate hikes from the BoE will start as early as Q4 2015, and continuing into 2016. Wages rose 2.7% in April due to better worker productivity and earnings growth, which are inflationary indicators that demand interest rate reaction.

Bank of England Monetary Policy Committee member Martin Weale said that the UK labour market is “fizzing away nicely”, and the Financial Times reported that Weale believes the Bank should start raising rates in August. Should this occur, as private banks are beginning to predict, this would give a boost to sterling. No doubt the hawks will return to the MPC meetings soon enough.

GBP/USD briefly touched 1.58, pulling back to it’s current trading position of around 1.5791

Greece

Greece submitted its first serious proposal for a new loan from the ECB on Monday, and Eurozone FMs will congregate tonight to chew over the new deal. European Commission President Jean-Claude Juncker was ‘of the opinion that we’ll achieve an agreement with Greece this week’. Meanwhile, Germany is insisting that Athens pass all the promised reforms within the new proposal by Monday. This is the next challenge for Greek PM Alexis Tsipras to coordinate. The new deal has moved away from the some of the core principles the more radical parties in his parliament wanted Greece to stick to. It is believed not to include any further reductions in pensions or public sector wages, but to include new taxes on businesses and the wealthy, and further increases to VAT. More details will come out in due course, but we’re still in for an eventful next few days for fans of this saga.

Global Comment

US New Homes Sales hit the highest level in seven years (+2.2%), beating expectations. The pickup is expected to contribute to GDP for the rest of the year. Q1 GDP figures are due to be released today, where forecast is for a ‘reduced decrease’ (better than it was, but still not great!) but the market may take this as good news when taken in conjunction with the improving housing market. Fed voting member Jerome Powell thinks those two factors are reason enough for an interest rate hike, which gave USD helping hand.

The Australian dollar slipped relative to USD, with AUS/USD jumping to 77.58 after holding at 77.12 at the end of trading yesterday. This was due both to a strengthened USD and to some dismal IMF conclusions at the end of a trip down under. IMF’s AUS mission chief was quoted as saying “Over the medium-term, and without reform, growth is likely to converge to a slower potential rate,” as well as that “we see Australia’s outperformance ending.”

Have a great day!