Euro May Rise as Risk Appetite Recovers, German Unemployment Falls

Key Overnight Developments

• Australian Lending, Home Sales Offer Mixed Cues on Rate Hikes
• UK Consumer Confidence Falls for Fourth Month on Austerity Fears

Critical Levels



The Euro rose 0.2 percent against the US Dollar, recovering back above the 1.22 figure. On balance, the single currency has been little changed over the past 24 hours, with prices tracking sideways in a choppy range above 1.2150. Likewise, the British Pound has been oscillating within 50-60 pips above/below 1.5070 since the beginning of the trading week. We remain flat EURUSD and GBPUSD.

Asia Session Highlights



Australian Private Sector Credit topped economists’ expectations, adding 0.5 in May percent to mark the sixth consecutive increase and matching the largest one since January 2009. Loans to buy houses lead the gauge higher, rising 0.7 percent. Separately, the Housing Industry Association (HIA) reported that New Home Sales fell 6.4 percent over the same period – the largest drawdown in nearly two years. On balance, the figures present a conflicting assessment of the impact the central bank’s tightening campaign has had on the real estate market, offering little actionable information to direct monetary policy expectations in the near term. As it stands, a Credit Suisse gauge of traders’ expectations shows markets are pricing in no further rate hikes for the next 12 months.

UK Consumer Confidence deteriorated for the fourth straight month in June according to a survey from GfK, a market researcher. A gauge of the overall economic situation in the coming 12 months dropped to the lowest in 13 months while the one tracking the climate for major purchases fell to levels unseen since August 2009. GfK managing director Nick Moon attributed the drop to worries about the impact of austerity measures including spending cuts and tax hikes introduced in an emergency budget earlier this month. The government plans to trim the fiscal deficit by a hefty 6.3 percent of GDP by 2014-15.

Euro Session: What to Expect



German Unemployment figures headline the economic calendar in European hours, with expectations calling for the number of people out of work to decline by 30,000 in June. The Unemployment Rate is set to hold steady at 7.7 percent. The labor market has routinely outperformed economists’ expectations this year but things may begin to turn markedly weaker going forward as business confidence erodes and economic growth slows in the aftermath of the EU debt crisis. Indeed, policymakers across the region are now making deficit reduction priority and the combined effects of austerity measures and rising borrowing costs – an outcome that goes hand-in-hand with financing large fiscal shortfalls – promises to keep performance lackluster for the foreseeable future. In fact, some evidence to this effect has already emerged: the forward-looking Expectations component of Germany’s IFO survey of business sentiment fell for the second month in June while preliminary PMI figures showed that manufacturing and service-sector activity slowed again over the same period after snapping a 14-month uptrend in May.

Elsewhere on the docket, the initial estimate of June’s annualized Euro Zone Consumer Price Index figure is set to show the inflation rate slowed to 1.5 percent. The outcome follows a similar outcome for Germany released earlier this week and reinforces a benign outlook for price growth, underscoring the likelihood that the European Central Bank is likely to maintain a broadly dovish posture in a bid to prevent a renewed slide into recession as governments’ deficit-cutting measures translate into spending cuts, tax hikes, and rising borrowing costs.

Turning to sentiment, US equity index futures are trading 0.3 percent higher, hinting risk appetite is likely to be supported in the near term and spelling gains for the spectrum of major currencies against the safety-linked US Dollar and Japanese Yen.

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