The Morning After The Night Before

After the celebratory rally against the majors on Friday the Euro crawled out of bed this morning in a more delicate state as investors focus on the fine print of the measures undertaken at the EU Summit. Furthermore, focus has shifted to the forthcoming ECB meeting where markets are expecting a rate cut. Manufacturing data across Europe and China have confirmed contraction for June. Across the Atlantic, market participants are likely to focus on the ISM manufacturing data later today which is expected to show deterioration for June. At home, manufacturing PMI just out has indicated a contraction for June, thereby turning focus onto the potential measures undertaken at this week’s BoE monetary policy meeting.

Pound Sterling – UK Markets

On Friday, the Pound moved higher against the majors as market sentiment improved following positive news flow from the EU Summit. However, there was no respite on the domestic front, as the Financial Policy Committee warned that UK's outlook had worsened due to the Eurozone debt crisis. Sterling has declined marginally against the US Dollar in today’s trading session after data indicated a slowdown in the Chinese manufacturing activity for June. Meanwhile, domestic data offered a mixed bag, with survey by Hometrack revealing that British house prices stagnated on subdued demand, while the Lloyds’ business barometer indicated an improvement for June. Data just out revealed that manufacturing PMI in the UK contracted for June, albeit at a slower pace. The outcome of the BoE’s monetary policy meeting slated later this week is expected to garner increased market interest as speculation over further easing has gained momentum in the recent past. With no significant economic releases on tap today, news flow from the Eurozone is set to provide direction to Sterling against the majors.

US Dollar – US Markets

Optimism surrounding the EU summit boosted risk appetite and dragged the US Dollar lower against the majors in Friday’s trading session. Additionally, data indicating stalling consumer spending and deteriorating consumer confidence casts doubts over the pace of the US economic recovery. Meanwhile, pouring cold water on hopes of a QE3, St. Louis Fed President, James Bullard, opined that the current US monetary policy is appropriate and additional easing would risk a rise in inflation. However, this morning the US Dollar is trading on a firm footing against the majors after weak Chinese manufacturing data prompted investors to shun high yield currencies. Additionally, manufacturing data across the major Eurozone economies have also shown contraction for June. On the domestic front, the ISM manufacturing data for June slated for release later today is likely to hog the spotlight and is expected to be downbeat, in sync with most of the recent weak regional manufacturing PMIs. Moreover, Markit manufacturing PMI and construction spending are also on tap for the day.

Euro – European Markets

A flurry of upside surprises in the EU summit allayed market concerns about the Eurozone debt crisis and aided the Euro to post gains against the majors in Friday’s trading session. Among the measures undertaken, the European leaders agreed over a single financial supervisory mechanism for the region, eased terms on loans to Spanish banks and announced access to bailout funds to directly recapitalise banks. However, the euphoria surrounding the EU Summit seems to have faded, with the Euro weakening against the US Dollar this morning. Moreover, data indicating a manufacturing gloom in China has spooked markets. Data just out has confirmed that manufacturing activity across Europe is still under a contraction phase for June. Against this backdrop, Eurozone’s unemployment data will be closely watched. With no other crucial macro releases or bond auctions on radar today, market participants are likely to deliberate over the various proposals discussed at the summit last week. Moreover, the ECB’s interest rate decision scheduled later this week is set to be keenly tracked where an interest rate cut cannot be ruled out.

Other Currencies – Highlights

The Yen has climbed against the majors this morning after the Bank of Japan’s (BoJ) Tankan quarterly survey indicated that Japan’s large manufacturers are optimistic about the business conditions in the third quarter and have planned to ramp up capital expenditure. Moreover, weak Chinese and European manufacturing data, coupled with overall muted market sentiment following the EU summit, have underpinned gains in the Yen. Meanwhile, Japanese vehicle sales for June showed a slower pace of growth. However, the BoJ Deputy Governor, Hirohide Yamaguchi, has warned that sharp gains in the Yen due to Europe's debt crisis could hurt Japanese corporate profits and the nation’s economy. With little in terms of domestic economic releases during the week, developments in the Eurozone and across the Atlantic are likely to provide direction to the Yen against the majors.