EU leaders confirm Summit decisions

Publication date: 10 July 2012
Author: Richard Driver, CaxtonFX

Monday’s session brought some further comments from central bank policymakers; the ECB’s Draghi left the door open to further monetary easing open, while there were mixed views from Fed policymakers on the merits of QE3 in the US. From the first day of the meetings between EU leaders, we largely saw confirmation of decisions made at the recent EU Summit.

Today’s session will reveal whether Germany’s Constitutional Court ratifies the new rules surrounding the eurozone’s permanent bailout fund (the ESM) and the fiscal compact.

STERLING/EURO: Sterling consolidated above the €1.26 level, ahead of UK manufacturing production and GDP estimate data.

• Eurozone growth data has been mixed this morning; French industrial production contracted sharply in May, while the equivalent figure from Italy provided a rare upside surprise. In terms of the debt crisis, yesterday’s Eurogroup meeting produced the confirmation that Spain’s banks will be granted €30bn in aid this month, whilst we wait for the ESM to be created. It was also confirmed that Spain will be allowed an extra year to cut its deficit to 3% of GDP, though bond yields remain at 7.0%.

• Germany’s finance minister stressed that direct recapitalisation of eurozone banks is conditional on the implementation of an EU banking supervisor. Whether or not Germany’s top court will approve the changes to the ESM and the EU fiscal compact will have major implications on the EU integration project. This pair is trading at €1.26.

STERLING/US DOLLAR: This pair attempted a recovery but lacked momentum in risk averse conditions.

• We saw contrasting comments from Fed policymakers yesterday, despite increasingly alarming figures from the US economy. Global equity indices represented a sea of red again yesterday, so sterling was unable to recoup much ground. This morning’s UK manufacturing production figure is unlikely to lend the pound much support, nor is the UK’s trade balance.

• This afternoon will see the release of the NIESR’s UK GDP estimate for Q2, which could also make for ugly reading. Losses in EUR/USD have weighed on this pair this morning, which is trading at $1.55.

EURO/US DOLLAR: The euro continues to look vulnerable ahead of the German court ruling.

• If Germany’s constitutional court rules that the new ESM and the fiscal compact are incompatible with German national law, this will be a major development and would certainly weigh on the single currency.

• The euro is trading at $1.23 and we continue to see considerable risks to the downside for this pair. There is a chance of a minor short-term bounce but lower levels are on the horizon.

STERLING/AUSTRALIAN DOLLAR: This pair was range-bound yesterday, but the AUD wasn’t helped by weaker Chinese import growth.

• Last night brought the news of a larger than expected Chinese trade surplus, driven by much weaker than anticipated Chinese import growth, pointing to reduced demand for aussie resources. In addition, a gauge of Australian business confidence hit a ten-month low. Broadly speaking, we anticipate that the growing evidence of a continuing slowdown in Chinese growth will weigh fairly heavily on the aussie dollar moving forward.

• Sterling is trading above 1.52 this morning and a further bounce is realistic amid ongoing negative sentiment.

STERLING/NEW ZEALAND DOLLAR: Sterling edged higher against the kiwi dollar amid negative news for the kiwi dollar at home and abroad.

• The NZD remained on the defensive yesterday as Chinese trade balance data revealed waning demand in the world’s second largest economy and one of NZ’s key trading partners. Domestic kiwi business confidence data also gave a disappointing showing and Asian stocks continued on their downtrend.

• Sterling is trading comfortably above the 1.95 level and we expect sterling to maintain a degree of upward momentum.

STERLING/CANADIAN DOLLAR: Sterling edged higher against the loonie in risk averse conditions.

• The Canadian dollar is looking powerless to resist the effects of declining stock and commodity prices. In terms of global economic developments, there is not much to support the Canadian dollar at present. Whilst Canada is among the healthier global economies at present despite some poor data last week, and the loonie continues to offer a considerable interest rate differential, data from the US and the eurozone and sentiment with regard to the eurozone is very much on the wane.

• This pair is trading well above 1.58 this morning and we could see further gains for the pound.