Cautiously bullish on EUR USD

The extended divergence between the improvement in Eurozone macro dynamics and conflicting signals from Greek public officials has kept the euro relatively supported until a new batch of US inflation data began to drag on the single currency. As Greece faces its next four payments to the IMF, totalling €1.6bn by end of June, we anticipate a government reshuffle as the most likely path ahead. In which case, this could unleash the departure of several radical members and force Tsipras to change Syriza’s coalition party.

A government reshuffle would help avoid the uncertainty associated with a referendum (on a Greek Eurozone exit) or snap elections and pave the way for the “new” government to pass new legislation on pension reforms, thereby allowing Greece to return to final agreement before payments are due by end of June.

Euro bears (those looking to short the euro) will find fertile ground in the event of a referendum as the environment will be exacerbated by capital controls on bank withdrawals and transfers. Such a situation would combine the euro gloom of the May 2012 elections with that of Cypriot depositors’ exodus in July 2013. Tsipras’ increasing pragmatism will not escape the conclusion that Greece must comply with the EU/IMF program in order to obtain the remaining €7.2 bn.

The impact of any positives from stabilisation in Greece risks on the euro will likely be absorbed by a gradual improvement in US data, further building the case for an autumn Fed rate hike. But once markets absorb the notion that any Fed hike this year would be all but a tightening of conditions, the case for buying the euro dips is more alluring than chasing the lows.