Greek Tragedy Takes Centre Stage

Against the backdrop of successive failures to form a government in Greece, markets keenly await the Spanish and Italian debt auctions later today. The outcome of these auctions is likely to be a key determinant of risk sentiment today. Risk appetite remains subdued despite the Chinese central bank cutting the amount of cash that banks must hold as reserves. At home, the Greek political conundrum has kept Sterling resilient against the Euro. Meanwhile, the BoE’s quarterly inflation report due Wednesday is likely to shed some light on factors that prompted the central bank not to opt for further stimulus.

Pound Sterling – UK Markets

The Pound fell against the US Dollar on Friday as risk aversion arising from JPMorgan’s unexpected trading loss sapped out demand from riskier assets. Additionally, the revision to UK’s construction output data indicating the fastest pace of decline in the first quarter for three years highlighted the nation’s fragile economic situation. In today’s trading session, Greece’s failure to form a coalition government over the weekend led Sterling to register gains against the Euro. Meanwhile, two former BoE officials have opined that Chancellor of the Exchequer, George Osborne, may need to go slow on his deficit reduction target to accommodate the weakness of the UK economy. After Friday’s data indicating easing PPI in the UK for April, the BoE’s inflation report due later this week is likely to be closely tracked for hints on the central bank’s stance on QE. Additionally, unemployment and trade data due later this week will also garner some market interest. With a light domestic economic calendar today, bond auctions in the Eurozone are set to determine the Pound’s direction against the majors.

US Dollar – US Markets

An unexpected trading loss by the banking giant, JPMorgan Chase, coupled with dismal economic data from China, led the US Dollar to climb against Sterling on Friday. However, the greenback was relatively range bound against the Euro. In today’s trading session, the US Dollar has moved higher against the Euro, as political deadlock in Greece looked set to continue for a second week. Moreover, traders remain cautious ahead of the Spanish and Italian bond auctions due later today. Meanwhile, hopes of more QE dampened considerably after data revealed that the consumer sentiment index in the US climbed to the highest level since January 2008. However, subdued inflation figures due tomorrow could once again stoke easing speculation. Additionally, the crucial FOMC minutes are also set to garner increased market interest later this week. With several non-voting members supporting policy tightening sooner than the Fed’s consensus view of end-2014, the minutes should provide insight into the voting pattern of the FOMC members.

Euro – European Markets

The Euro has slipped against the majors in today’s trading session, as coalition negotiations hit an impasse on Sunday and a radical leftist leader rejected an invitation from the President for a final round of talks. This has made a second round of elections in Greece inevitable. Additionally, political landscape in Germany turned murkier with Chancellor, Angela Merkel's conservative party suffering a defeat in the regional elections. Making matters worse for the Eurozone, the European Commission on Friday downgraded growth forecasts for Spain and Greece. With the Spanish 10 year bond yields hovering above the 6% mark, the Spanish and Italian bond auctions due later today will be watched closely in order to gauge the pessimism among market participants. The Euro zones' finance ministers, meeting later today, are expected to emphasise the implications of failing to continue with the agreed austerity measures in Greece and focus upon the ongoing difficulties of the banking sector in Spain.

Other Currencies – Highlights

An unexpected decline in New Zealand’s retail sales for the March quarter has weighed heavily on the Kiwi Dollar against the US Dollar this morning. The previous week also saw a slew of dismal domestic data with slowing growth in the housing market and a contraction in manufacturing activity. Additionally, prospects of fresh elections in Greece, coupled with a weak set of Chinese economic data released on Friday, dampened the appeal for the Kiwi Dollar. However, reports indicating a rise in New Zealand’s Performance of Services Index for April and China’s decision to lower its reserve requirement ratio failed to impact the Kiwi Dollar. During the week, the release of first quarter producer price inflation and ANZ Consumer Confidence Index for May is likely to prove crucial for the movement in the Kiwi Dollar.