Mountain To Climb As Leaders Approach Summit

The Euro has suffered against the majors this morning as markets remain wary ahead of the EU summit commencing this week aimed at arresting the European debt crisis. The optimism surrounding the announcement of easier collateral rules from the ECB on Friday has faded today. In the US, regional manufacturing activity and new home sales data due later today is likely to shed some light on the need of a QE3. At home, with a light macro calendar today, traders minds are likely to be occupied with the quantum of additional asset purchases expected to be announced at the BoE’s monetary policy meeting due next week.

Pound Sterling – UK Markets

The Pound has begun the week on a firm note against the Euro, on account of fading optimism ahead of the EU summit later this week. However, Sterling has turned lower against the greenback, as hopes of a new round of stimulus from the Bank Of England received a boost on affirmative comments from the policymakers for additional quantitative easing. BoE policymaker, David Miles and Martin Weale have opined that easing inflation has opened considerable scope for further stimulus to revive the British economy. Meanwhile, the Bank for International Settlements (BIS) cautioned that BoE may be putting the economy at risk by persisting with low interest rates and indulging in regular asset purchases. With no major economic releases scheduled today, markets are likely to focus on the final GDP reading slated later this week which is expected to confirm that the UK economy slipped into a recession in the first quarter. Public sector borrowing and current account balance data are other releases expected to garner market attention during the course of the week.

US Dollar – US Markets

The US Dollar is trading higher against its major counterparts, as hopes of a major action in the forthcoming EU summit this week faded after reports indicated that Greece’s Prime Minister and Finance Minister would not attend the meeting due to health issues. Moreover, investors preferred to seek shelter in safe haven currencies after the BIS in its annual report opined that world economy remains out of balance, with advanced economies grappling with debt problems and emerging nations facing risks due to the gloomy economic environment. Today’s manufacturing data for Chicago and Dallas regions are set to be closely tracked against the backdrop of a sharp decline in the Philadelphia manufacturing index for June reported last week. The new home sales performance for May is also on market radar, especially after heightened worries over the housing sector following last week’s dismal existing home sales report. News flow from Europe and economic releases across the Atlantic are expected to set the risk tone in today’s trading session.

Euro – European Markets

In Friday’s trading session, the Euro moved higher against both the Pound and the US Dollar after leaders from Germany, France, Spain and Italy agreed on the introduction of stimulus package of about €130 billion for the bloc. Moreover, the ECB agreed to accept a wide range of collateral and assets of lower quality in its lending operations, a move designed to ease stress in the region’s financial system. Data indicating a decline in the German business climate index for June had little impact on the currency. However, the Euro has retreated against its major peers this morning and is hovering close to the 1.25 mark against the US Dollar, as reports indicating the inability of Greek Prime Minister and Finance Minister to attend the EU summit spurred speculation of no major action at the summit. With a light calendar for the day, market participants stay focused on the outcome of the French bills auction slated later in the day. As a noteworthy event, Spain is set to officially request a bailout from the European Union in today’s session.

Other Currencies – Highlights

Muted risk sentiment ahead of the EU summit later this week sapped out demand from riskier assets and dragged the Canadian Dollar lower against the US Dollar this morning. Meanwhile, Friday’s data indicating an easing inflationary trend for May, coupled with an unexpected decline in retail sales for April, faded speculation over a rate hike by the Bank of Canada in the near future. Adding to the woes, the Bank of Canada Governor, Mark Carney, last week warned that the nation’s economy is largely debt-based but such dependence could not continue indefinitely. He pointed to an overall economic expansion and reiterated that an interest rate hike or modest withdrawal of stimulus might become appropriate. Investors are expected to keenly track the GDP data for April scheduled for release later this week for hints over the stance that the central bank might adopt during the course of the year.