Investors were focused on events in Europe this week, ahead of Sunday’s Greek elections. The US economic data released during the week was generally weaker than expected. Anticipation of action by global central banks helped mortgage rates end the week a little lower.

The highly anticipated elections in Greece will take place on Sunday, and investors hope that the outcome will help reduce some of the uncertainty in Europe. The elections feature a conservative party which supports the EU bailout package against a radical leftist party which opposes the bailout plan, and polling indicates that it will be a close race. If the leftist candidate wins, it likely will destabilize the country and call into question whether Greece will remain in the EU. Given the small size of Greece, its exit from the EU would not have a major impact on economic activity in the region. The major concern is that once one country leaves the EU, it could open the door for other countries to follow, which could have a destabilizing effect on economies around the world.

The situation in Europe likely will have a strong influence on the US Federal Reserve, which will release its next meeting announcement on Wednesday. With slow economic growth in the US, a prolonged period of economic weakness likely in Europe, and slowing growth in most emerging economies, the Fed may be more willing to provide additional stimulus. One of the stronger forms of stimulus would involve bond purchases, the possibility of which has already been favorable for mortgage rates. The Fed is divided over what to do, however. Some Fed officials have expressed reluctance to ease further, questioning its impact with interest rates already at such low levels. Fed Chief Bernanke has repeatedly stated that action by government leaders would be much more effective than monetary policy at this point. In any case, we are in a period of extremely high uncertainty, and historic events over the next several days could have a significant impact on mortgage rates.

Events over the next week could define the economic environment for a long time to come. The Greek elections will take place on Sunday. There is expected to be a meeting of EU officials shortly after the results are known. The US Fed will release its meeting announcement on Wednesday, and expectations for some form of further easing have increased this week. Receiving less attention, Egypt will be holding elections this weekend as well, and the results may impact the stability of the Middle East. Next week’s economic data probably will not be much of a factor. Housing Starts will be released on Tuesday and Existing Home Sales will come out on Thursday.

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