Sterling Still Struggling
There were no further headlines of a euro-negative variety overnight, which allowed risk appetite to stabilize somewhat. Both the euro and the Australian dollar recovered a little, and Asian stocks even managed to eke out some gains. EURGBP continues to track higher on the back of the dovish BoE’s Inflation Report and Governor King’s comments. While the BoE’s central forecast for inflation was revised up in the short run as expected, the real surprise came in the form of the downward revision on the crucial 2/3-year horizon. The projected undershoot of the 2% inflation target signifies the readiness of the BoE to expand QE further, particularly if the Eurozone crisis and bank funding pressures intensify. Meanwhile the world press has picked up on yesterday’s reports that the ECB has reduced its lending to Greek banks pending recapitalization. Unnamed sources claimed that four Greek banks might be operating with negative equity capital, prompting the ECB to freeze lending to such institutions and so requiring the banks to turn to the Bank of Greece for Emergency Liquidity Assistance (ELA). The ECB later confirmed that some Greek banks have indeed been moved to ELA from the main operations, but that the recapitalisation would be finalised “soon” – allowing troubled institutions to return to normal ECB funding channels. SYRIZA, which still leads in public opinion polls and is likely to figure prominently in any new government, is still showing no signs of softening its stance on the current bailout agreement. Indeed, party head Alexis Tsipras called for a freeze on wage/pension cuts and all state asset sales until a new government is installed. And despite hopes for a softening of the ‘austerity approach’ in the Eurozone, any ‘growth initiatives’ will likely entail supply-side reform measures, suggesting that those looking for bolder demand-boosting actions from the fiscal side will be disappointed. The FOMC minutes from the April 24-25 meeting offered little support for USDJPY, with the worsening situation in Greece since then already cementing expectations that the Fed will have to keep the QE door open. Today, initial jobless claims are due and the key question remains whether the multi-year downtrend can reestablish itself after several weeks of more volatile prints.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank