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By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC
In Greece, the very fact that three parties failed to form a coalition meant that the country would be heading to fresh elections on June 17 with the anti-austerity Syriza party expected to emerge as favourites. Economic commentators seemed resigned to the fact that the closer Syriza emerges victorious in next month's elections, the closer Greece is towards exiting the European Union - and the initial effects were drastic.
Up to 700 million Euros were withdrawn from Greek banks on May 14th (0.75% of overall holdings) and this was followed by the announcement that the ECB suspended four (unnamed) Greek banks from receiving its regular liquidity operations. The undercapitalization of these banks was the reason for the suspension, and this latest move by the ECB will no doubt amp up the pressure on Greece to stick true to its promised path of austerity. To cap matters off, rating agency Fitch downgraded Greek debt from B- to CCC.
Greece developments mirrored by negative Eurozone data
The negative developments from the Greek saga seem to go hand-in-hand with more negative growth data from the Eurozone - this week saw a host of European economic growth forecasts take a turn for the worst. Eurozone industrial production contracted -2.2% (Exp 1.40%, Prev -1.5%) year on year and -0.3% (Exp 0.40%, Prev 0.8%) month on month. The more forward looking ZEW survey for economic sentiment in Germany fell to 10.8 (Exp 19.0, Prev 23.4) while overall economic sentiment in the Eurozone came in at -2.4 (Prev 13.1).
On a rare bright spot, German GDP beat expectations by five times when first quarter GDP came in at 0.5% (Exp 0.1%, Prev -0.2%) quarter on quarter. French growth stagnated during the first quarter at 0.0% (Exp 0.0%, Prev 0.1%) while Spanish output contracted -0.3%, as expected and in line with the previous month reading. Growth in the Eurozone on a whole was flat, at 0.0%. The Euro slipped just under 1% against the US Dollar to close at 1.2780 in trading this week, after touching an intraweek low of 1.2642.
UK growth forecasts cut on Euro uncertainty
In the UK, the headline event was Wednesday's Inflation report. In its first announcement since the rate decision, the BoE MPC slashed future growth forecasts for the UK to 0.6% (down from 1.3%) for 2012 and cut growth forecasts for 2013 to 2.0%, down from 2.8%.
The uncertainty and risk from the Eurozone has had its impact on the global economy - if last week's weaker Chinese data (GDP and export data) wasn't proof enough - Mervyn King's alarming cut to growth outlook for the UK economy would surely confirm it. The British Pound nose dived after the press conference and never really managed to gain any momentum through the end of the week. GBP settled above 1.58 levels against the US Dollar to close the week more than 1.5% lower.
Against the Euro, the British Pound shed 0.6% to snap four consecutive weeks of gains against the common currency. Next week promises to be another decisive week for British Pound traders as a slew of UK related data will see volatility high in GBP crosses. Inflation data on Tuesday is expected at 3.1% year on year with core prices expected to come in at 2.0%. Wednesday's BoE meetings will surely reinforce some of the key growth points from the inflation report and Thursday's UK output data is expected to contract -0.2%.
Staff
