Greece To Go Back To Polls, EUR/USD Hammers Lower

There is to be no coalition deal in Greece according to the nation’s politicians and Greece will now head for a second round of elections in mid-June. We’re not sure who believed there would ever be a coalition deal, but someone must have been threatening to do so because EUR took another clobbering when no deal was found.

We know from recent polling that around 70% of Greeks wish to stay in the Eurozone although this seems to be lazy polling. I’m sure they want to stay in the Eurozone but nobody has asked the crucial question; ‘at what cost?’ The promise of no more austerity has been broken to the Greek people; they can have the euro but does the pain match the reward? That’s the question that they should be asking on June 10th. Needless to say, pressure on global financial markets will only increase in the meantime.

Where this euro bounces back is anybody’s guess, we’ve been looking for a squeeze on the those short the euro for nearly 3 big figures in EURUSD and it has not been forthcoming. We are less than 0.5% away from the lows seen in January before we saw that bounce back following the French sovereign downgrade.

One side effect of this EURUSD slump has been to see GBPUSD through 1.60 in 4 weeks. The relationship behind dollar moves is now back to that “flight to safety” dynamic and further bad news from the Eurozone, or indeed anywhere, will see further flows into the greenback. The magnitude of the GBPUSD move is obviously less than that of the move in EURUSD and hence we are seeing fresh 3.5yr highs in GBPEUR this morning.

Similar pressures are being seen in the bond markets with Spain’s 10yr bond now over 6.5% and Italy’s above 6% both for the first time since December and the first LTRO liquidity operation from the ECB that calmed everybody’s nerves. We are getting close to the levels that the ECB decided to buy Italian debt through its SMP program in order to depress yields; some will be betting that they bite that bullet again in order to give the periphery some breathing space.

Amidst all this, we have the Bank of England’s quarterly inflation report which is set to show us that inflation is likely to remain high and growth low. This comes only a week after the Bank decided to halt the asset purchase program; extraordinary measures to keep the UK economy going. We may find out today that growth may have to take a back seat in the coming months to fighting inflation although if the Bank of England believes that Greece is bound for the abyss then we will see a bumper increase in QE. They start speaking at 10.30.

Before that, in this economic day of woe, we have UK unemployment at 09.30 with the unemployment rate scheduled to increase to 8.4%.

Today is definitely a day for the tin hat.

Latest exchange rates at time of writing