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Euro Weekly Update - May 27th 2016

Euro Weekly Update - May 27th 2016It was more of the same for the Euro. Despite some reasonably brisk €Z economic data it failed to shine, principally because investors' attention was elsewhere.

That is not to say it had an awful week: the euro lost four fifths of a cent to sterling and was down by only a dozen ticks against the US dollar.  But the pound had another good run, helped by a growing confidence that Britain would vote to Remain within the European Union at next month's referendum.

The economic statistics from Euroland mostly either met or exceeded expectations. Among the preliminary purchasing managers' index readings, which measure activity in private sector companies, the only cause for concern was among French manufacturers, who continued to report slowing business. Revised figures from Germany showed the economy expanding by 0.7% in the first quarter, with businesses and consumers more confident than before.

The GBP/EUR pair reached their highest level – 1.32 – since February on Wednesday thanks to anti-Brexit fuelled sentiment towards the pound. It was beaten about the head for a couple of months after the announcement of the EU in/out referendum in late February.  Since then the pound has been on the advance as the odds (currently 2/11 on) have trended towards a vote to Remain.  Just as the original panic selling was somewhat overdone, so sterling's recent bull run smacks of premature euphoria. Time will tell, but be prepared for a setback if a black swan appears and the mood changes.

Federal Reserve bosses were out in force: Hardly a day went by without one or more of the regional presidents standing up to warn that the next interest rate rise might come as soon as next month. A couple of them even said there could be two or three rate hikes this year.  Even so, financial futures pricing indicates only a 26% chance of a June increase. Therefore, whereas in the past that rhetoric from the Fed would have sent the dollar higher, last week it only served to keep it steady.

Looking ahead, the euro could come under increased pressure after Greece agreed a deal to unlock a further 10.3bn euros ($11.5bn; £7.8bn) in loans from its international creditors, after talks in Brussels. Greece requires this tranche of cash to meet debt repayments due in July. The Greek government owes its creditors more than €300bn - about 180% of its annual economic output (GDP).

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