Germany Softens Stance

Risk appetite has improved significantly this morning and is likely to continue in this trading session, following positive news flow from the EU Summit. European leaders have apparently agreed upon a plan to establish a single financial supervisory mechanism for the region and have relaxed conditions for repayment of emergency loans to Spanish banks. In the US, Chicago manufacturing PMI and consumer confidence data, due later today, is expected to be overshadowed by optimism surrounding the EU Summit. At home today, markets await Mervyn King’s press conference before the release of the latest Financial Stability Report, for hints on monetary stance at the next policy meeting.

Pound Sterling – UK Markets

The Pound has strengthened against the US Dollar this morning, as positive sentiment following the first round of the EU Summit prompted traders to shun safe haven currencies. However, this positivity surrounding Europe has led Sterling to trade on a weak footing against the Euro. Meanwhile, a survey by Gfk NOP revealed that the Queen's Diamond Jubilee celebrations failed to boost the spirits of UK consumers, with British consumer confidence remaining stable for June. Data just out indicated that the index of services remained unchanged for April. In yesterday’s trading session, the Pound had moved lower against the US Dollar amid subdued sentiment surrounding the start of the EU Summit. Additionally, the final revision to the first quarter GDP confirmed a recession in the UK and substantiated the BoE Governor, Mervyn King’s earlier warning over the grim outlook of the British economy, strengthening speculation of a revival of the stimulus programme. With no major domestic economic releases today, market participants are likely to focus on the second day of the EU summit and await the BoE Governor, Mervyn King’s press conference later today.

US Dollar – US Markets

Market optimism over stabilisation plans suggested by European leaders prompted investors to move towards riskier assets and led the US Dollar to weaken against the majors this morning. Yesterday, the greenback climbed against both the Pound and the Euro, amid uncertainty ahead of the commencement of the EU summit. Meanwhile, domestic macro data continued to signal weakness in the economy with a less than expected fall in initial jobless claims and a decline in Kansas City manufacturing activity data. The first quarter GDP growth figures were also left unrevised yesterday. Meanwhile, Dallas Fed President, Richard Fisher reiterated the importance of fiscal policies as he opined that no amount of monetary policy can substitute the nation’s fiscal needs. Today’s session sees the release of the core personal consumption expenditure for May and the revised reading for the Reuters/Michigan consumer confidence index for June. Moreover, manufacturing data for the Chicago region is expected to be weak and does not bode well for next week’s ISM manufacturing data.

Euro – European Markets

Yesterday, cautious sentiment surrounding the EU summit and a rise in German unemployment rate led the Euro to trade with a downward bias against the US Dollar. However, the Euro has rebounded and posted decent gains against the majors this morning, after European leaders succeeded in allaying market concerns in agreeing to relax repayment terms for Spanish emergency loans and easing conditions on prospective aid for Italy. Risk appetite received a further boost amid reports that the region’s leaders are contemplating a plan to establish a single financial supervisory mechanism for the region and have provided substantial concessions to expand short-term financial support to the system. Meanwhile, economic data released earlier today in Germany and France failed to have any impact on the Euro against the majors, as investors stay focused on the news flow from the EU Summit. The forthcoming ECB monetary policy meeting next week is expected to be keenly eyed for measures to support the region’s economy.

Other Currencies – Highlights

The Swiss Franc has strengthened against the US Dollar this morning after the KOF Swiss economic barometer unexpectedly climbed for June. Additionally, the institute has projected the nation’s GDP to grow in the coming months, despite headwinds in Europe. This came in sharp contrast to the decline in the UBS consumption index reported earlier this week. Meanwhile, Jean-Pierre Danthine, the Vice Chairman of the Swiss National Bank, has justified the central bank’s move and stated that the cap set on the Swiss Franc is the best strategy for managing the economy. Additionally, he refrained from ruling out further measures, including possible capital controls, in case of a deeper crisis. A raft of significant economic releases next week including manufacturing PMI, consumer price inflation and retail sales are expected to be keenly tracked for hints on the nation’s overall economic landscape.