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By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC
The rise of smaller, individual splinter parties who secured their seats on the back of anti-austerity campaigns shook risk sentiments as markets doubted Greece's ability to keep up with the agreed measures, throwing their position in the Euro in severe doubt once again. EURUSD opened the week at a 70 point lower gap and spiralled lower throughout the week as Greek leaders failed in their efforts to form a coalition government and top European policy-makers amped up the pressure on Greece to stick to its chosen path of austerity to secure future bailouts.
The heads of the ND, Syriza and most recently the PASOK have all failed in forming a coalition government and with a council set to be established as a result of the disunity, Greece will now head to fresh elections in June which means the political uncertainty plaguing the markets will be extended for at least another month more. The situation in the Republic is complex and plagued with uncertainty; and with several of its key players reaching an impasse this week, the risk off trade will keep equities and the Euro suppressed - EURUSD's closing at 1.2917 levels on Friday exposes the next key support level of 1.2630, the 2012 low. EURGBP continued its fall, closing its fourth consecutive week lower at 0.8039. The pair was able to bounce higher after breaching 0.8000 levels earlier on Friday but the strong bearish technical and fundamental picture for the cross suggests that further moves on the downside are very much on the cards.
Australian Dollar feels effect of slowing China forecasts
The other notable loser on the week was the Australian Dollar which closed 1.3% lower against the US Dollar. In the past two trading weeks, the pair has fallen from 1.045 levels to Friday's close of 1.0019, a drop of more than 4%. The resulting uncertainty from Greece has certainly weighed down higher yielding assets but the recent weaker news flow from China has further amplified the lower move on the Aussie Dollar.
A raft of economic indicators from the world's second largest economy painted a rather bleak picture of Chinese growth prospects - Thursday's trade balance increased to $18.42bn (Prev $5.35bn) on the back of a large drop in Chinese imports (Act 0.4%, Exp 12.5%, Prev 5.3%). Although the figure reflected a large surplus, exports dropped to 4.9% (Exp 9.1%, Prev 8.9%) hinting that demand is slowing for Chinese goods, with Chinese consumption also waning.
Friday's inflation data was lower as expected at 3.4% (Prev 3.6%) but the weaker industrial production figures (Act 9.3%, Exp 12.2%, Prev 11.9%) and slowing retail sales (Act 14.1%, Exp 15.1%, Prev 15.2%) further cast doubts on future Chinese growth. Chinese officials have already toned down their growth forecasts from 8.00% to 7.50% earlier in the year and recent GDP data showed that the Chinese economy grew at 8.1%, down from a growth rate of 8.9% in the fourth quarter of 2011. Sluggish demand from both home and away have seemed to hit the Chinese economy hard - and this slowing will continue to impact the Australian and Kiwi Dollar.
Bank of England keeps rates unchanged
And finally, the Bank of England kept rates unchanged at 0.50% and assured the markets there would be no increase to the target £325 billion asset purchase plan, for the time being. GBPUSD was in a bullish mood following the confirmation, touching 1.6180 levels before moving lower to close the week at 1.6068 levels as risk aversion saw the US Dollar boosted across the board.
Looking at the week ahead, it's a critically busy week for the Eurozone - amidst tracking the political developments from the Greek Republic we turn our attention to several key growth indicators for the Euro - on Monday the Greek growth figure is due (Prev -7.5%) along with the Eurozone industrial production figure (Exp -1.40%, Prev -1.8%).
On Tuesday, Germany and the Eurozone as a whole will announce their Q1 GDP readings, which will be followed by the all-important German and Eurozone ZEW readings. Wednesday sees the release of Eurozone inflation data and as if the economic calendar wasn't busy enough, several European bond auctions will also drive pricing in the week ahead - Italy and Spain will be auctioning on Monday, the EFSF and Greece will hold an auction on Tuesday with Spain rounding off their second auction on Thursday. And across the pond, US inflationary data due out on Tuesday is expected to decrease to 2.4%, Prev 2.7%. Industrial production is due on Wednesday along with the critically important FOMC meeting minutes.
Staff
