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Forex Analysis

04/29/2015 07:42:36

FOMC statement key as rate hike fast approaches

Tsipras’ referendum pledge throws another spanner in the works

OANDA. European futures are pointing to a slightly more positive start on Wednesday, as the “Brussels Group” meets to continue discussions on Greek reforms, while later in the session we’ll get the preliminary reading of first quarter US GDP and the latest monetary policy decision and statement from the Federal Reserve.

Greek Prime Minister Alexis Tsipras yesterday said he believes a deal will be reached by 9 May between Greece and its creditors on the list of reforms that would secure the €7.2 billion in bailout funds that the country needs to avoid default. This would come just before the eurogroup meeting on 11 May, which I would imagine is when finance ministers would approve the deal, and the country’s next repayment to the IMF on 12 May of €763 million.

He did state though that any deal may go to a referendum if it falls outside of the mandate that got him elected. Such a move would likely anger the countries lenders as it could cause further delays and throw another spanner in the works. It would also be a costly exercise and you wonder if Greece can afford to fund itself in the meantime.

Should today’s talks prove productive and some actual progress be made, I think it will make people more optimistic that a deal will be done. Already, yields on Greek 2-year debt have fallen from a high of 30% last Wednesday to 20.07% yesterday, in a sign that traders are more optimistic of a deal being reached. Some remain skeptical that this new negotiating team changes anything but if some progress can be achieved today, maybe that will alleviate some of those doubts.

While all of that continues in the background, attention will shift to the US today as the country releases its preliminary reading of first quarter GDP. It’s been a dreadful quarter for the country and recent earnings, despite currently outperforming low earnings expectations, haven’t been great, especially on the revenue side.

Forecasts for this GDP reading have been gradually lowered throughout the first quarter, to the point that some barely expect the country to have grown at all and a negative reading probably wouldn’t surprise. A number of factors have contributed to this, lower oil prices, strong dollar and poor weather so I don’t think people will come down too hard on it, especially as we saw a similarly poor performance in the same quarter last year.

I guess the big question is what the Fed will make of it during its meeting today. It is expected to announce no change in interest rates later on and release a statement alongside the decision. With no press conference scheduled to accompany the decision, the statement will be scrutinized for any hint at when the first rate hike will come, with some still thinking June. The Fed has stated in the past that the decision is data dependent, although much of the data has been very strong, which suggests inflation, the dollar and earnings are possibly deterring it from hiking rates now.

The FTSE is expected to open 35 points higher, the CAC 18 points higher and the DAX 19 points higher.

Craig Erlam
Senior Market Analyst


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