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The Tsipras train keeps ‘rollin’

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Peter Rosenstreich – Head of Market Strategy:

FX markets seems to be underestimating the risk surrounding the Greek issue. With the Greek Prime Minister Alexis Tsipras securely winning a confidence vote on his strategy to renegotiate the bailout program, he has strengthened his mandate for change. Heading to Brussels this week, Tsipras is holding a strong hand with public support clearly backing his radical anti-austerity demands. Investors are wishfully hoping that the rumored EU Commission half year debt extension and ECB renewed Greek debt buying has halted EUR selling pressure. Yet while Greek stocks continually take a beating, the EUR is well off January lows. We still don’t see a deal this week, as newly empowered Tsipras, will surely make unreasonable demands from the EUs perspective. After this short consolidation period, EURUSD bearish trend should continue with a break of range floor at 112.70 targeting 1.1098 year lows.

EUR risks prevail before Finance Ministers meeting

Ipek Ozkardeskaya – Market Analyst:

Euro-zone Finance Ministers meet in Brussels today to discuss about the Greek situation. Greek PM Alexis Tsipras reiterates that his country is not willing to accept the extension of the bail-out package, no matter how hard Germany insists. Greece is ready to negotiate terms and procedures for existing debt payments says Tsipras, yet is clearly against paying the existing debt by contracting new debt, and therefore remaining stuck in this infernal vicious circle. The Greek sovereign bonds yield above 20% for 2-year maturity, above 16% and 10% for 5, 10 year maturities respectively as Greek FinMin Varoufakis says debt cannot be paid in the near future. Varoufakis will take a try to push back the February 16th deadline to apply for a bail-out and seek alternative solutions to service the dangerously approaching repayment dates (see figure). As the yield spread between Greek and German bonds widen, the 40-day rolling correlation between 10-year Greek/German spread and EURUSD turns negative (-10%), from +20/40% range on ECB QE expectations and announcement era. Therefore leading us to think that the EUR-traders are increasingly skeptical on potential Grexit.

EUR/USD technicals are favorable for short-term pick-up to 1.1445/1.1534 (Fibonacci 23.6% on Dec’14-Jan’15 drop / post-Jan 22nd high) yet traders will be seller on rallies as long as uncertainties on Greece persist. We still don’t see a deal this week, as newly empowered Tsipras, will surely make unreasonable demands from the EU’s perspective. After this short consolidation period, EURUSD bearish trend should continue with a break of range floor at 1.1270 targeting 1.1098 year lows first than lower to 1.10 psychological support. Option barriers trail below 1.15 in preparation to today’s event risk.

Some color out of the UK

Hearing Cameron speaking, the small caps in the UK may also benefit from targeted liquidity injections if his party wins elections in May. The goal is to fill the funding gap of small firms in need to help them grow into medium then big caps. The project has a name “Help to Grow”, targeting 500 fastest growing firms to obtain “the kind of finance their German equivalent still get”. The finance “gap” is estimated to sum up to 1 billion pound per year, which should not be hard to finance. This billion pound project will be financed by private lenders, or public/private co-investing, whereas government’s balance sheet will be the guarantee to loans. Quiet a good investment indeed. A 100 million pound worth pilot program will take place before elections, on next budget. The program will then extend if Cameron’s party successfully wins people’s support in May elections. If not, a labour-led government will most probably reject the program to reduce spending and consolidate UK’s budget.

The Cable trades water, sweeping the top of Sep’14-Feb’15 downtrend top (1.5292). The GBP-bulls remain on the sidelines before Thursday’s Quarterly Inflation Report (QIR). We expect the BoE to maintain its dovish stance as the low inflation environment necessitates no rush to a premature policy normalization. Especially given the gloomy economic outlook in the neighboring Euro-zone. Technically, GBPUSD bias remains comfortably positive. The 21-dma (1.5152) is seen as support before the QIR, while offers are presumed pre-1.5292 (downtrend top) if breached should send the pair into fresh bullish consolidation zone with vanilla calls supportive above 1.53 before the week’s closing bell. On the downside, the selling pressures should intensify below 1.51 in case the IR reveals unexpectedly bearish BoE stance.

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