RELIEF AHEAD FOR THE EURO AFTER GREECE

IN the currency market, all eyes are on Greece ahead of the key austerity vote later today. The general consensus is that George Papandreou will be able to push through the legislation, aided by defectors from the opposition New Democratic party. On Monday, ND deputy Elsa Papadimitriou indicated that she may vote for the austerity measures despite the reservations of her party. However, Papandreou’s margin is too close for comfort and markets remain nervous, which is being reflected in the seesaw price action of the euro this week.

Politics is always difficult to handicap, especially in such an incendiary environment as Athens, where angry protesters attack riot policemen with rocks and tear gas fills the streets. Greek deputies could always surprise with a no vote, sending financial markets into a tailspin. Yet there is such an institutional desire to avoid a credit crisis in the EU that I continue to believe authorities will somehow manage to avoid a complete financial meltdown, as every party reaches a compromise that pushes the issue of Greece’s solvency somewhere into the distant future.

Meanwhile, on the economic front the picture in core Europe remains remarkably robust. Yesterday, the German GFK consumer sentiment reading for July was much better than forecast at 5.7 versus 5.3, indicating that the booming German economy is having a positive impact on the consumer psyche, despite the turmoil created by the debt crisis in the periphery.

The positive news on consumer sentiment could translate into better results in German retail sales, which have been highly disappointing this year, contracting for two out of the past three months. German retail sales are projected to rise 0.7 per cent, versus 0.3 per cent the month prior, but could surprise to the upside given yesterday’s strong readings. The GFK data also hint at continued strength in German labour markets, with unemployment expected to decline another -17K from -8K last month. Both of the reports are due tomorrow, after today’s Greek austerity vote, and assuming that passes the parliament, the euro-dollar could see a relief rally to $1.4500, especially if the economic data proves supportive.