EUR/USD – What’s Bad for Europe Is Good for the Euro

• ECB says it will not accept Greek debt as collateral
• German central banker critical of Greece
• EU increases growth forecasts for eurozone

The Greek goodwill tour by Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis smashed into a stone wall in Frankfurt. Although the meeting the two Greek politicians had with German Finance Minister Wolfgang Schauble went about as you would expect from the two polar opposites on the topic of bailout terms, the European Central Bank (ECB) jumped into the fray by announcing after hours that it would no longer accept Greek sovereign debt as collateral. The forex market was further jolted by the news with some suspected intervention by the Swiss National Bank that drove the EUR higher.

The European Union released its economic growth forecasts that also boosted the EUR’s advance versus major pairs. The economists at the European Commission, the E.U.’s executive arm, said the eurozone should grow 1.3% this year and 1.9% in 2016. In November, they expected growth of 1.1% this year and 1.7% next. The decline of the currency and cheaper oil are the major contributing factors to the improvement of the forecast.

The Commission raised its growth estimates for most of Europe’s largest economies, including Germany’s, France’s, and Spain’s. It is important to note that the cutoff date for the forecast was January 23, days before the Greek election. The estimate for Greece’s economy is to expand by 2.5%, down from 2.9% with the expectation that the bailout terms would be unchanged, which is highly unlikely at this point.

ECB: No Greek Debt as Collateral

The ECB’s decision ties the Bank of Greece in a bind, as it only has emergency liquidity assistance (ELA) since the nation’s bonds are not accepted as collateral in exchange for funds. In light of the €11 billion allegedly withdrawn from Greece’s banks after the Syriza party’s election night victory this development does not bode well for the Greek financial system, and could spark a run on the banks.

Varoufakis is calling it blackmail as the terms make the decision effective February 11. He says under regular ECB financing, the cost would be 0.05% versus the 1.55% cost of the ELA program.

The ECB made it clear that it was accepting junk-rated debt in the past as part of an agreement that included austerity program compliance. Since the central bank assumes the probability of that happening is low, it has decided to end the program. The last time Greek lenders needed the ELA was in 2012 during the bailout negotiations.

E.U. Cuts U.K. Growth Forecast as BoE Holds Steady
The E.U. lowered its headline inflation forecast for the U.K. to 1% in 2015, down from the 1.6% expected back in July. U.K. gross domestic product (GDP) was cut to lower growth in 2015 to 2.6%, down from 2.7% previously forecasted.

GBP/USD is retracing its steps towards yesterday’s session high of 1.5250 as the currency pair trades around 1.5243. The decision by the Bank of England (BoE) had little effect as with three months to go before the U.K. general election. Political uncertainty will keep the central bank in a holding pattern until the May 7 election. The E.U.’s lower forecasts for U.K. growth were taken with a grain of salt given the factors that were considered: Greek bailout uncertainty and the lower price of oil are now beginning to shift.

Oil Prices Lifted by Chinese Stimulus
Crude touched the $55-a-barrel price after China announced further liquidity injections to spur its economy. Oil has reversed some gains after stronger inventories were announced, as oil producing nations continue with record outputs. Energy companies have begun to cut down on new developments and scaling back production from unprofitable projects, but those moves will take some time to hit the market. Global demand signals like the one from China have driven the commodity higher along with comments from Organization of the Petroleum Exporting Countries Secretary-General Abdulla al-Badri that the price had hit bottom.

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