"Grexit" Fears Fade

The week has started with the “risk on” trading sentiment returning to markets as weekend Greek opinion polls indicated that pro-bailout parties are finding support among the nation’s voters. Though, this has kept market fears of a potential Greek exit from the Eurozone at bay, the pendulum could swing either way ahead of elections scheduled for mid June. Meanwhile, market concerns over Spain’s finances and the S&P downgrade of five Spanish banks suggest that all is not well in Spain. With a light economic calendar globally today, the upcoming week offers crucial economic releases which are likely to reflect the state of the global economy.

Pound Sterling – UK Markets

On Friday, the Pound moved higher against the Euro as concerns over Spain’s finances came to the fore. News that Catalonia was finding difficult to finance its debt, coupled with uncertainty surrounding the Spanish bank Bankia, tipped the scales in favour of Sterling. The Pound has reversed its previous session gains against the Euro and is trading lower in today’s trading session, as fears of Greece leaving the single currency union subsided following indications that the pre-election opinion polls are in favour of pro-bailout parties. Meanwhile, Sterling has advanced against the greenback after data from Hometrack revealed that average price of a home in the UK increased for May. During the course of the week, market participants are likely to keep an eye on mortgage approvals, GfK consumer confidence and Nationwide house price data. The PMI reading towards the end of the week is expected to garner most of the market interest and will shed some light on the impact of the recessionary environment on the nation’s manufacturing activity.

US Dollar – US Markets

The US Dollar advanced against the Euro and Sterling in Friday’s trading session as Spain's deteriorating finances and S&P’s credit rating downgrade of five Spanish banks prompted traders to move towards safe haven currencies. Additionally, better than expected US consumer sentiment data for May kept a tight lid on QE3 chatters. In today’s trading session, the US Dollar has slipped against its major counterparts, as fears of a Greek exit from the currency union eased after recent opinion polls in Greece indicated that the nation’s voters favoured pro-bailout parties. No major US economic releases are slated for release today on account of Memorial Day holiday. However, the upcoming week offers plenty of major macro indicators which are likely to keep traders busy. On Thursday, markets will be closely tracking the first revision to Q1 GDP numbers followed by non-farm payrolls and ISM manufacturing slated during the final trading session of this week. These indicators are expected to provide insights into the latest trends in the US economy and help markets gauge the possibility of additional easing in future.

Euro – European Markets

The Euro retreated against the majors on Friday, as Spain’s wealthiest autonomous region, Catalonia, called for assistance from the central government in tackling its debt problems and S&P downgraded its credit rating on five Spanish banks. Additionally, the health of the Spanish banking sector remains fragile with reports suggesting that Spain could recapitalise the Spanish bank, Bankia. However, the Euro has witnessed a trend reversal against its major peers this morning and hit the 1.26 mark against the US Dollar earlier, as recent surveys revealed that Greece's conservatives have regained an opinion poll lead. This renewed optimism is likely to keep the Euro buoyed in today’s trading session, although traders would continue to monitor these developments as the pendulum could swing in either way until the elections are held in mid June. With a light economic calendar today, consumer price inflation and unemployment figures from Germany and the Eurozone scheduled later this week are likely to be on traders’ radar. Additionally, Irish referendum during the week is also expected to generate some market interest.

Other Currencies – Highlights

The Japanese Yen is trading higher against the US Dollar this morning amid market speculation that the Bank of Japan (BoJ) might refrain from offering more stimulus in the near future. The minutes of the BoJ’s latest monetary policy meeting revealed that policymakers intend to keep offering monetary stimulus automatically until 1% inflation was in sight. Additionally, data released earlier today revealed that Japan’s corporate service prices rose 0.2% in April following a revised 0.2% decline posted in March. Despite hopes of additional stimulus for the Japanese economy taking a backseat, the Yen has retreated against the Euro as positive outcome of opinion polls in Greece provided a boost to high yield currencies. Meanwhile, unemployment, retail sales, manufacturing and industrial production data would be closely eyed by markets during the course of the week for further hints on the health of the Japanese economy.