Pound up following Interest rate news Will Europe agreek or disagreek

15 July, 2015

Matthew Boyle

With the majority of news still surrounding the Greek situation, much of the normal FX data released has had little impact in recent weeks. However yesterday Bank of England chief Mark Carney announced that the UK was getting closer to an Interest rate hike. Despite UK inflation this month being at 0, it is forecast that through 2016 this rate will rise and should move back towards the target level of 2% to trigger a rate hike. Some are suggesting that the first MPC member could vote for this hike as early as September this year, which would start the ball rolling and intent for a projected rise sometime during 2016. Consequently the market reacted and the pound gained around 1.5 cents against the USD and around a cent against the currently flagging Euro. Poor retail sales data from the US allowed the Euro to gain against the Dollar in the mornings trading, however by the end of trading these gains had almost all but eroded. Unsurprising given the current Greek situation and uncertainty.

So what is happening now with Greece?

The situation as it is still very much in the air despite what many of the media outlets are reporting that “an agreement has been reached”. Certainly an agreement in principal has been tabled, however there is still a long way to go. In order for the Troika to accept Greece must meet the bailout terms which means pushing 4 pieces of crucial legislation through parliament, and in a very short time period which is no small ask. Essentially now Greece PM Tsipras must get passed 4 austerity bills including pension and tax reforms through a government voted in for their non-austerity stance.

If Greece are unable to do this their banks face almost certain collapse and an exit from the Eurozone. This follows news on Tuesday from the IMF that Greece missed yet another payment, now taking their overdue debt to around €2 billion Euros. So we are now reaching a critical time for Greece, as these reforms must be passed tomorrow. Following that there will be a possible vote by the EU members on the 16th/17th about the bailout, all ahead of the 20th July when Greece are due to pay the IMF €3.5 billion Euros.

So what does this all mean in regard to the rates?

It is an unprecedented situation we find ourselves in, and as such commenting on which way it will go or by how much is near impossible. Many analysts are split, and the bottom line is still at present the outcome and impact of this is yet to be seen. Some analysts fully expect GBP>EUR rates to drop if agreement is reached as the Euro will regain stability. Whilst others argue in essence this is further Eurozone financial stimulus which would weaken a currency, whilst also suggesting that a 3rd bailout is simply delaying the inevitable that this will just happen again. What is certain is that rates art present are around a cent away from the best they have been all year and before that going back to 2008. So if you have an upcoming transfer stay in close contact with your CI account manager as we are in for a bumpy ride!

For those of you who are concerned you might want to give serious consideration to getting something done now, should an agreement be reached the rates drop given the current levels. Elsewhere we have data of note in the Bank of Canada Interest rate decision and statement, and also New Zealand inflation data. And this morning we also have UK unemployment data which could move GBP/EUR rates further. Whilst most of the market remains fixed on Europe and Greece, those with Loonie or Kiwi requirements may also like to keep a close watch.