Written by Jameel Ahmad, Chief Market Analyst at FXTM
For the second successive week, global financial markets are commencing trading facing downside pressures with investors reacting unfavourably to the news that a “No” vote was declared victorious in the Greek referendum. While Tsipras is optimistic that the outcome of the referendum can be used as leverage for stronger negotiating power when discussing possible terms with creditors, this is likely to just be wishful thinking. In fact, rather than provide Tsipras with more negotiating power, all the outcome of the Greek referendum has done is push us closer to a Grexit than we have ever been before.
The stance from creditors is expected to remain as resilient as ever and with Tsipras sure to use the outcome of the vote as motivation to continue rejecting further austerity, the discrepancy between negotiating parties has stretched once more with this meaning that we remain even further from a potential deal being reached. There is no doubting that we have stepped closer to a Grexit and with this being a risk that was continually underpriced in the financial markets, global indices will remain vulnerable to further pressures. It is important to remember that although there is an argument that Greece does not have a large economy and is the weakest member of the Euro, the global implications of the Greece situation remain unknown and it is because of this uncertainty that worldwide markets will encourage facing vulnerabilities.
Why did the GBPUSD fall to a three-week low at 1.5529 in the aftermath of the Greek referendum? Bank of England (BoE) Governor Carney admitted last week that UK financial stability is exposed to pressures over the Greece situation and with the decision from the Greek people to overwhelmingly reject austerity meaning the uncertainty in Greece is set to continue, investor sentiment towards the Pound has consequently weakened. While Carney did also state that the direct exposure is minimal, confirmation that the UK economy can be impacted has encouraged selling momentum in the GBPUSD.
What happens to the GBPUSD now? The 1.5520 area is seen as solid support for the pair and now that we have finally hit this level, I would expect the GBPUSD to bounce higher in the short-term. One thing to consider with the Pound, and this would be a longer term consideration, is that if Carney can talk down the currency by admitting UK financial stability has worsened due to the Greece crisis, it should be taken into account what the views of Carney would be if an EU referendum is announced. This would encourage further downbeat comments, which also puts the GBPUSD at threat to future declines. Not only this, but it would further eliminate interest rate expectations to the point where there might be hesitation from the BoE to even begin mentioning interest rate rises.
Although the risks of a Grexit intensifying contain negative consequences for the EURUSD outlook and resulted in the pair opening at 1.0986, it once again only managed to fall below 1.10 for a short period of time with this ultimately meaning traders have found another buying opportunity. 1.10 is seen as a critical psychological level for the EURUSD and it’s only where the pair manages to close below this level that the outlook for the pair changes to expect heavy selling momentum.
The close below $56.80 last week was an indicator to expect further downside pressures and the commodity has now fallen as low $54.54. Investor sentiment is continually plagued by oversupply concerns, and the news that progress on Iran’s nuclear programme has been made will also weaken investor sentiment towards WTI Oil. This is because progress on a deal being reached means we are stepping closer to economic sanctions in Iran being lifted, which ultimately means that for the oil markets, the oversupply will grow even further. The oversupply concerns have already returned to elevated levels anyway following the previous comments from the Energy Information Administration (EIA) that US stockpiles are rising being validated by recent inventory data.