Investors are waiting for crucial decisions on Greece and Ukraine. The EUR/USD little changed and the zloty extended losses. The Fed ready for hikes in mid 2015.
An empty economic calendar shifts investor's attention toward political developments. As yesterday, the key factors to watch are negotiations between Greece and its creditors. The second major issue is truce talks in Minsk between Russia and Ukraine supported by county's European allies.
Unofficial news on Tuesday pointed at a positive outcome in both cases. However, there is no optimism in the financial markets. Although yesterday stock markets posted gains, today the atmosphere is more gloomy.
The currency market is waiting for outcome of today's meetings. The EUR/USD has narrowed near 1.13 since Monday. The frank kept its gains against the euro and the dollar as risk aversion looms. The risky currencies dropped.
Two Federal Reserve members confirmed that the central bank is pursuing its plan to increase rates. Jeffrey Lacker – Richmond Fed president – pointed at June as an “attractive option” for hikes. Moreover, the San Francisco president John Williams said that current economic conditions are getting close to the appropriate moment for hikes.
Clearly hawkish comments from the Fed haven't affected the EUR/USD and the GBP/USD. However, the USD/JPY posted some gains.
Scenarios for Greece
Greece expects from its creditor a mitigation of repayment conditions and easing of austerity measures. Yesterday the German finance minister Wolfgang Schaeuble said that there is no chance for further concessions for Athens. A stiffen stance of Berlin reduces a chance for Greece to accomplish all its goals.
Yesterday information agencies said that Greece may get additional 10 billion euro, what would be enough to provide money for the government for additional six months. This time would be used to find a permanent solutions that would please both sides. The conditions of debt repayment would be also eased – the budget surplus to repay its creditors would be lowered to 1.5-2 percent GDP form 4.5 percent.
The Greek financial market was hit again. Three year bond yields moved above 20 percent and stock market dropped about 4 percent.
Heightened volatility in the markets reveals a lack of confidence in the final outcome of today's negotiations. Negative scenario is a dismantle of the euro zone. However, the most probable scenario is an agreement that forces both sides to some concessions. A similar scenario will be supportive for the euro in the short term.
The likelihood for a positive information coming from Minsk is lower the in the Greece case. The truce negotiations between Russia and Ukraine supported by its European partners (France and Germany) are less likely to yield a positive outcome. Moscow is in a better position as the European Union unity has deteriorated and the frozen sanctions are not severe. Moreover, the United States will send lethal weapon to Ukraine, if peace talks fails, what could be used by Moscow as an argument to increase its support for separatists.
The uncertainty prevails in the markets. That resulted in the EUR/USD moving in a narrow band around 1.13. Other major currencies were more volatile, but the atmosphere of expectancy predominates.
The zloty was pressured by risk aversions as other currencies in the region. Until the outcomes of today's talks concerning Greece and Ukraine, the Polish currency will remain prone to drop.