Foreign Currency Market Update – GBP / EUR Update
Sterling struck a new seven-year high of 1.4310 against the Euro at the beginning of this week’s session as markets reacted to news that capital controls have been imposed in Greece.
GBP/EUR traded close to 1.3950 last Monday as Athens put forward a list of economic reforms that its creditors deemed ‘a positive step in the process’.
However, analysts opted to push the single currency lower on Tuesday through fear that Greek PM Alexis Tsipras would not be able to get the tough reforms – which included a 10% rise in restaurant tax, higher pension contributions and a corporation tax hike – through parliament. Subsequently, Sterling went on to strike a four-week high of 1.4120 against the Euro.
Demand for the common currency remained soft on Wednesday when it was reported that the IMF had rejected Athens’ latest proposal. The Fund urged the Greek government to hike VAT rates even further, introduce tougher pension reforms and cool off on corporate tax hikes. Tsipras said that the IMF’s insistence on such measures suggested officials either ‘didn’t want a deal’ or were ‘serving specific interests’.
The negotiations continued to stall on Thursday as Greece maintained that it would not be crossing its ‘red lines’ on pension reform, whilst the nation’s creditors argued for further cuts.
And GBP/EUR rose to a monthly high of 1.4131 on Friday as the Syriza government announced plans to hold a referendum on Sunday July 5th to allow Greek citizens the opportunity to decide whether the country should accept the latest austerity measures recommended by the institutions. However, lenders rejected Athens’ plea for a minor bailout extension, meaning that Greece will likely default on a €1.6 billion repayment to the IMF on Tuesday June 30th. Subsequently there may not be an aid deal waiting for Greece even if it does vote in favour of further austerity.
Matters took a turn for the worse over the weekend as PM Tsipras announced an emergency Bank Holiday and imposed capital controls. Reports of ‘endless queues’ at ATMs in Greece followed as panicked Greeks attempted to withdraw the new €60 daily limit.
It does not look like missing the repayment to the IMF on Tuesday will instantly be considered an official default and there appears to be hope among some European leaders that a last-minute deal will be achievable if Greece votes to accept the latest austerity measures in Sunday’s referendum. However, a ‘NO’ vote has been described by European Commissioner Jean-Claude Juncker as a message to ‘the whole planet’ that Greece wants to leave Europe.
The Pound struck a seven-year high of 1.4310 in response to the introduction of capital controls as the prospect of a Greek exit became even more realistic. German inflation and Eurozone unemployment reports are unlikely to have much of an impact on the single currency this week as ‘Grexit’ fears grip markets.
British manufacturing and service sector PMI reports could give Sterling a bit of a boost across the board if they impress and this could translate into gains for GBP/EUR, but the majority of trades will be driven by ‘Grexit’ speculation.
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