Most important events today will be the press conference of the ECB

Today’s Comment

One of the most important events today will be the press conference of the ECB. We do not expect any changes in the interest rate or new signals about coming changes in the interest rate, but the reason why it is nevertheless worth keeping an eye on the press conference is, of course, that in no way has the crisis in Greece and the euro zone become less severe since the ECB’s April meeting. On the contrary, the crisis has escalated, and that has questioned the role of the ECB and its possibilities of taking action to put a damper on the turmoil. One of the options available to the ECB is reintroducing long-term repo auctions at fixed rates in order to ensure sufficient liquidity in the system. This may not, however, suffice really to do away with the uncertainty in the markets. Most likely purchases of government bonds in the market will have a stronger impact. Such a solution may be a bitter pill to swallow for several ECB members, and we do not expect this option to come into play at the ECB meeting today. If the turmoil in the markets escalate further (if, for instance, we see further pressure on Spanish government bonds), it may become the case.

Another event that the market will follow over the coming days is the election in the UK, and it has been a long time since a general election in the UK has been as thrilling as now. We expect initially that pound sterling will weaken for a short term if the election result in a hung parliament. If the government formation turns out to be fairly smooth, and the new parliament quickly begins to deal with the economic challenges, we assess there will be no marked movement. In our view, the most important threat to GBP is a development where the government formation is long in coming or if we have to have a second ballot. We do not think a second ballot is particularly likely but if such a scenario materialises, pound sterling may come under pressure. For the time being, we maintain our 1-month forecast at 87 for EUR/GBP to reflect the risk associated with the election. We still think that in the long term pound sterling offers potential that has not yet benefited from the economic improvement that we have seen after all.