Euro May Rise Absent Greece Surprise, Expanded ECB Guidance

The Euro may have scope to correct higher unless Greece fails to secure its latest funding tranche or ECB President Draghi expands on last week’s “forward guidance”.

Talking Points

Latest Greek Funding Tranche in Focus as Eurozone FinMins Meet in Brussels
Euro Unlikely to Find New Downside Catalysts in IMF Report, Draghi Comments

All eyes turn to Brussels to start the trading week as Eurozone Finance Ministers convene to approve the next tranche of funding for Greece after an investigative visit from “troika” (EU/ECB/IMF) inspectors over the weekend. Some reports suggest observers were unsatisfied by progress made on reform efforts but Greek Finance Ministers Yannis Stournaras said a deal to unlock €240 billion in loans will probably be struck before the sit-down begins. Investors are well aware of the gap between facts and officials’ rhetoric however and will be watching closely as results from the summit emerge.

Other topics of discussion may include the recent surge in Portugal’s borrowing costs – where the benchmark 10-year bond yield soared above the closely-watched 7 percent level last week – as well as Cyprus aid efforts. Separately, the IMF is due to release its annual “Article IV” report on the state of the Eurozone economy while ECB President Mario Draghi will sit for his quarterly testimony to the Committee on Economic and Monetary Affairs of the European Parliament.

Given the progress on containing the debt crisis achieved since last year’s report, the IMF is likely to stress lingering recession in the common currency area. The international lender called on the ECB to cut interest rates and deploy unconventional easing measures in 2012; it seems likely do so again, but the sting of such comments may be neutralized after the central bank’s dovish outing last week. The same may be true of Mr Draghi’s testimony, where further details on the ECB’s new “forward guidance” are likely to be vague at best. On balance, this seems to hint that the Euro has scope to correct higher absent an unexpected snafu in Brussels.

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