The overarching monetary policy divergence theme struck back with a vengeance last week, with the DXY recording its best weekly performance in almost a year. The bar by which the Fed will measure the appropriate time to raise interest rates is well defined, albeit somewhat vague, and the second quarter economic data appears to be moving in the right direction to increase confidence the first step towards interest rate normalization will begin in the latter half of 2015. The FOMC has outlined the necessary conditions for rate hikes will be continued improvement in labour market conditions combined with the notion of comfort inflation is moving in the right direction towards the FOMC’s 2.0% target, the latter which was confirmed with Friday’s CPI numbers that came in stronger than anticipated. First quarter GDP revisions in the US will be released at the conclusion of this trading week, with deterioration in net exports as a result of a high-flying dollar likely to push GDP growth into contraction from the first estimate of 0.2% growth. That being said, last week saw two regional Federal Reserve banks emphasize the “residual” seasonal distortion effects that historically have affected Q1 GDP reporting, and that the Bureau of Economic Analysis will look at making changes to sort out the distortions when reporting Q2 GDP in a little over two months. With the holiday-thinned liquidity conditions resulting from the Memorial Day long weekend in the US, the greenback is seeing a continuation of the price action witnessed at the close of Friday, with the big dollar gaining against the majority of the G10 space.
Acknowledging the similarity to a broken record, the Greek saga continues to drag on with little progress made over the weekend, though Interior Minister Voutsis did reiterate Greece’s inability to successful complete the €1.6bn of IMF repayments due throughout June. The discussions surrounding pension and labour reform continue to be at the heart of the negotiations, with little to suggest Greece and Prime Minister Tsipras are close to budging and giving in to what they consider are “irrational” demands. The negotiations between Greece and its creditors have become more important owing to the developments in Spain over the weekend, where the anti-austerity party Podemos made strong political gains in regional and local elections. Confirming the support for political pushback in the EU against austerity is not limited to Greece, the handling of the debt negotiations will be a key barometer should Podemos see a similar rise to power like Syriza in Greece. The euro is lower against the greenback extending last week’s losses as we go to pixels, but expect any Greek headlines to dominate price action in the early part of the week.
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