June has historically been a weak month for financial markets, but with a host of key economic drivers set to unfold we expect volatility to remain high.
The month will prove to be a make-or-break month for Greece, as it is due to repay about €1.5 billion (Dh6bn) to the IMF. With the first tranche (€305 million) due this Friday, Greek debt talks have reached a critical stage.
There has been a lot of mixed rhetoric over the course of the past week – amid negotiations that have carried on for months now.
The IMF chief Christine Lagarde warned of the “possibility” of a Greek exit from the euro, which was quickly countered by the ruling Syriza party’s economy minister, Giorgos Stathakis, who maintained that the cash-strapped nation would fully honour its commitment by the June 5 deadline.
Market sentiment dictated there had been a breakdown in negotiations over the past few days in which the euro had slipped even further against its major currency peers.
The euro shed about 2 per cent against the dollar last month, and the Greece saga will continue to drive risk sentiment, particularly in the euro crosses.
With Greece’s bailout programme set to expire at the end of this month, we expect the euro to remain under pressure and volatility in euro crosses to remain alarmingly high. Judging by current pricing action, initial support in the euro-US dollar falls at 1.07, with longer-term support falling between 1.045 and 1.055.
Amid the Greek saga, the European Central Bank is set to meet tomorrow to announce rates. The ECB president Mario Draghi is expected to maintain the stimulus programme for the euro zone and field numerous questions about the possibility of a Greek exit. The benchmark rate is expected to remain unchanged at 0.05 per cent, and the marginal lending rate is expected to stay put at 0.3 per cent.
Also weighing down the euro is the potential for an improving US data docket, which would shore up the dollar’s gains as it brings Fed expectations into play even more.
A key index for US manufacturing, the ISM Manufacturing, is expected to come in stronger than expected, while the monthly US non-farm payrolls are expected to show gains of 240,000 on Friday.
Judging by the recent weekly initial jobless claims data, a stronger-than-expected reading cannot be ruled out.
Last month’s payrolls, although slightly weaker than expected, showed that unemployment was dropping amid an increasing labour force participation rate, which was the key takeaway.
Over the past two years, the unemployment rate has dipped because of a shrinking labour force. However, last month’s figures brought a positive change to this trend.
We will keep an eye on both numbers. Any gain in the labour force participation rate coupled with a shrinking unemployment rate would show a true strengthening in the US jobs market.
As has been the status quo for the past few quarters now, improving US data would raise Fed expectations of a rate hike, which would support dollar forecasts in the month ahead.
Finally, Opec will also meet in Vienna on Friday. It is highly unlikely the cartel will change its output targets.
Oil prices have recovered nicely over the past two months, in which the West Texas Intermediary crude contract gained more than 26.5 per cent to $60 a barrel.
We can expect it to stay at the current level, with the WTI contract expected to range between $56 and $64 a barrel.
Gaurav Kashyap is a foreign exchange expert based in Dubai.
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