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Talking Points

  • US Dollar to Rise as Stocks Slump in the Wake of FOMC
  • Euro Zone, Chinese PMI Data to Compound Risk Aversion
  • EU Leaders May Salvage Sentiment with Greek Crisis Fix

The US Dollar is likely to extend gains as S&P 500 stock index futures push lower ahead of the opening bell in Europe, hinting the headwinds left in the wake of the Federal Reserve’s monetary policy announcement will continue to weigh on sentiment and drive demand for the safe-haven greenback. Shares fell 0.7 percent in Asia after the Fed said the US economic recovery was “somewhat” slower than initially expected and lowered its second-half GDP growth rate forecast to 2.7-2.9 percent from the 3.1-3.3 percent outlook given in April. Policymakers also trimmed their outlook for employment growth.

Still, Chairman Bernanke said the recovery will gather steam in the second half of the year as temporary barriers dissipate while inflation eases, essentially signaling a third round of asset purchases (“QE3”) is not in the cards for now. Plainly put, this means policymakers are willing to allow for more pain before stepping in to proactively stimulate again. Needless to say, the markets were not pleased with the outcome considering the implications of sluggish growth in the world’s largest economy for the global rebound at large.

On the data front, preliminary Euro Zone Purchasing Manager Index figures are expected to show that manufacturing- and service-sector growth slowed for the second consecutive month in June, expanding at the slowest pace in seven months. The figures are likely to feed existing pessimism spreading across the markets, particularly after an estimate of Chinese Manufacturing PMI from HSBC released overnight predicted industrial-sector growth in the East Asian giant slowed for the third straight month. Sizing up the overall environment, this paints a picture of looming slowdown in all three major engines of global growth (China, US, Europe) in the second half of the year, a broadly negative outcome for risky assets and correlated currencies.

With that in mind, the focus on macroeconomic themes may not prove long-lasting as investors’ attention shifts back to the Euro Zone debt crisis as EU leaders begin a two-day summit in Brussels. The chance of a Greek fault as priced into CDS rates, which represent the cost of insuring against such an outcome, is on the rise again and now stands at 82.3 percent. While progress toward a resolution has been painfully slow, this kind of brinksmanship is nothing new for European policymakers. Meanwhile, the regional bloc was always an arrangement that put political expediency above economics, so the emergence of some kind of scheme to patch up the current situation at least at the surface level seems inevitable. While any such plan will almost certainly solve none of Greece’s core problems, a credible-enough setup will offer short-term boost to sentiment and take the spotlight off longer-term growth concerns for the time being.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

0:00

AUD

Conference Board Leading Index

0.1%

-

-0.1%

2:30

CNY

HSBC Flash China Manufacturing

50.1

-

51.1

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:00

CHF

Trade Balance (CHF) (MAY)

-

1.44B

Low

6:00

CHF

Exports (MoM) (MAY)

-

7.9%

Low

6:00

CHF

Imports (MoM) (MAY)

-

4.0%

Low

7:00

EUR

French PMI Manufacturing (JUN P)

54.0

54.9

Low

7:00

EUR

French PMI Services(JUN P)

60.5

62.5

Low

7:30

EUR

German PMI Manufacturing (JUN A)

57.0

57.7

Medium

7:30

EUR

German PMI Services (JUN A)

55.7

56.1

Medium

8:00

EUR

Italian Consumer Confidence Index s.a. (JUN)

105.3

106.5

Low

8:00

EUR

Euro-Zone PMI Composite (JUN A)

55.2

55.8

Medium

8:00

EUR

Euro-Zone PMI Manufacturing (JUN A)

53.8

54.6

Medium

8:00

EUR

Euro-Zone PMI Services (JUN A)

55.3

56.0

Medium

8:30

GBP

BBA Loans for House Purchase (MAY)

30000

29355

Medium

10:00

GBP

CBI Reported Sales (JUN)

13

18

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.4180

1.4418

GBPUSD

1.5728

1.6202

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