EU Summit: Meaningful Breakthrough Limited

The much awaited two day EU summit commences today and looks set to dominate near-term market dynamics. With Merkel continuing her anti-Eurobond rhetoric, reaching a common platform during the summit seems unlikely and is expected to mount pressure on the ECB to unveil measures to boost the region’s economy. The final US GDP data due later today is likely to be overshadowed by news flow from Europe. In the UK, the sequential first quarter GDP numbers have been left unrevised this morning. With a light domestic calendar today, Sterling is expected to take direction from the developments in the Eurozone and general risk appetite.

Pound Sterling – UK Markets

The Pound traded on a weaker footing against the US Dollar yesterday as pessimism ahead of the EU Summit sapped out demand from high yield currencies. The macro indicators offered a mixed bag, with the British Bankers' Association revealing that mortgage approvals for May dropped to their lowest level in over a year while the Confederation of British Industry indicated that retail sales in the UK for June rose at the fastest pace in more than a year on the back of Queen’s Diamond Jubilee celebrations. This session has seen the Pound post marginal gains against the Euro following disappointing German jobs data. Meanwhile, the final UK GDP data just out indicated that the economy contracted 0.3% sequentially in the first quarter, unchanged from the previous estimate. Weak up take of mortgage loans last month seems to have negatively affected home prices, as Nationwide Building Society earlier today reported an unexpected drop in UK house prices for June. With little to offer in terms of major economic releases today, Sterling is likely to track news flow emanating from the EU Summit.

US Dollar – US Markets

The US Dollar strengthened against the majors in yesterday’s trading session. Data revealing a rebound in durable goods orders for May, coupled with a more-than-expected rise in the pending home sales for the same period, has lessened concerns over QE3. Yesterday’s trend continued this morning, with the US Dollar trading on a firm footing against both the Pound and the Euro as German unemployment data disappointed investors. Meanwhile, a split among the Fed officials over the need of further quantitative easing was evident, as Chicago Fed President advocated the need to accommodate more while Atlanta Fed President indicated that he does not feel that that current conditions warrant aggressive actions. On the economic front, the revised GDP data for the first quarter due later today is expected to show an unchanged reading. Today’s Kansas manufacturing and jobless claims data is also likely to be closely tracked for more hints over the recent trends in the economy, especially after key Fed officials recently expressed concerns over anemic growth and weakness in the job market.

Euro – European Markets

The Euro was broadly under pressure against the US dollar in yesterday’s trading session amid fading hopes of a quick fix to the Eurozone debt crisis at the EU Summit. Meanwhile, the German consumer price inflation for June easing to its lowest level in 18 months has opened doors for a further rate cut by the ECB. Adding to speculation, the ECB’s Executive Board member, Peter Praet, indicated that an interest rate was very much on cards. In today’s trading session, the Euro has weakened against the majors after data indicated that German unemployment rate unexpectedly rose for June. The Eurozone confidence indicators due later today are also likely to be closely tracked and are expected to be largely downbeat. As the much-awaited EU summit finally gets underway today, market expects little concrete on the containment of the debt crisis. Expectations from the summit remains low, as the German Chancellor, Angela Merkel,continues to brush aside the idea of joint Eurozone bonds. Moreover, the outcome of another round of Italian bond auctions will also be keenly eyed today.

Other Currencies – Highlights

The Yen has strengthened against the majors this morning, as subdued sentiment surrounding today’s EU summit and downbeat German unemployment data prompted investors to move towards safe haven assets. Moreover, data indicating that Japanese retail sales grew more-than-expected for May and speculation that Japanese companies would repatriate their overseas earnings ahead of the completion of the second quarter aided the Yen to post gains against the majors. On the economic front, tomorrow’s economic calendar features a string of significant releases such as manufacturing, industrial production, unemployment and consumer price inflation data. The outcome of these releases is expected to provide insights into the stance that the Bank of Japan might take in its next monetary policy meeting. In today’s trading session, news flow from the Eurozone is likely to provide direction to the Yen against the majors.