Euro Slump
Fears of a disorderly Greek exit pushed EURUSD below 1.2600 even before the ‘informal’ EU Summit kicked off, challenging those euro bulls who had been assuming that ‘all the bad news is priced in’ and serving as a reminder of the continued scope for disappointment. Such concerns were initially fanned by comments from an unnamed official that “the Eurogroup Working Group agreed that each Eurozone country should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro” – since denied by the Greek Finance Ministry. Though the official did acknowledge “nothing was prepared so far on the Eurozone level for now, for fear of leaks”, the continued absence of any signs of progress towards a consensus on key issues (Eurobonds, deposit guarantees, bank recapitalisation options) triggered further euro selling. Indeed, official jawboning dominated the headlines, with French President Hollande’s stated aim to put Eurobonds and an EFSF banking license on the table failing to excite the market in the light of opposition from other leaders – most notably, Germany’s Merkel, who asserted that no formal decisions would be made now. This will leave the market hanging until the next Summit on June 28-29. This uncertainty should continue to feed into broader US dollar strength, with the better than expected April new homes sales (up 3.3% m/m to a 343k annual rate) and March FHFA house price (up 1.8% m/m) prints adding an extra layer of support. The pound remains heavy, having come under pressure after the MPC minutes revealed a “finely balanced” posture for several members despite the of 8-1 vote against more QE last month. The focus now shifts to the Chinese/Eurozone PMIs and German IFO for guidance.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank