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FOREX: Euro, Risky Assets Vulnerable Ahead of Merkel, Sarkozy Summit

FOREX: Euro, Risky Assets Vulnerable Ahead of Merkel, Sarkozy Summit

2011-08-16 05:45:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • Merkel and Sarkozy to Meet in Paris, EFSF Size Likely in Focus
  • Euro Zone, German GDP Figures to Reaffirm Global Slowdown
  • UK CPI Data Unlikely to Cause a Stir Ahead of BOE Minutes

All eyes are on the outcome of a meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel in Paris as the heads of the top countries in the Euro Zone hash out the implementation of the bold initiatives announced at the EU leaders’ summit in July. The most actionable item on the agenda is likely to be an expansion of the EFSF bailout fund, giving it the necessary monetary firepower to deliver on its new powers to funnel money directly into ailing banks as well as to intervene in secondary bond markets. As we discussed last week, the current arrangement whereby these functions have fallen to the European Central Bankseem mostly reflective of policymakers’ ineptitude, for surely if the EFSF had the wherewithal to manage its enhanced mandate the central bank would not need to pick up the slack.

Euro Zone Gross Domestic Product figures are in focus on European calendar. German output is expected to add 3.2 percent while region-wide growth slows to 1.8 percent in the year to the second quarter, marking the weakest readings in over year. Needless to say, the readings don’t bode well for the Euro, compounding downward pressure on already deteriorating ECB interest rate expectations that now call for a rate cut on tap within the next 12 months.

The implications for overall sentiment are likewise ominous. Coming on the heels of yesterday’s broad-based recovery in risk appetite, the GDP data may remind investors that the headwinds facing the global recovery that sparked the aggressive selloff in the first two week of the month remain in place, weighing on shares as well as correlated currencies including the Australian, Canadian and New Zealand Dollars anew. S&P 500 stock index futures reinforce the likelihood of a “risk-off” tone, trading down 0.5 percent in late Asian hours.

Elsewhere on the docket, the UK Consumer Price Index report is forecast to the annual inflation rate rose to 4.3 percent in July. Perhaps even more significant than the headline figure, the core inflation reading is set to snap a two-month losing streak to register at 3 percent. While the report may factor into price action down the road, its immediate impact is likely to be muted as markets wait for tomorrow’s publication of minutes from this month’s Bank of England policy meeting, with traders keen to learn if the number of MPC committee members voting for a rate hike shrank and/or if perennial hawk Adam Posen was finally joined in the call for additional quantitative easing. Either outcome seems likely to weigh heavily on the British Pound, with the latter packing a greater punch than the former.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

1:30

AUD

Reserve Bank’s Board Minutes (AUG)

-

-

-

2:00

CNY

Conference Board China Leading Index (JUN)

158.9

-

157.4

2:30

CNY

Actual FDI YoY (JUL)

19.8%

-

2.8%

Euro Session: What to Expect

GMT

CCY

EXP

PREV

IMPACT

6:00

EUR

German GDP n.s.a. (YoY) (2Q P)

3.2%

5.2%

High

6:00

EUR

German GDP w.d.a. (YoY) (2Q P)

3.1%

4.9%

High

6:00

EUR

German GDP s.a. (QoQ) (2Q P)

0.5%

1.5%

Medium

8:30

GBP

DCLG UK House Prices (YoY) (JUN)

-

-1.6%

Low

8:30

GBP

Consumer Price Index (YoY) (JUL)

4.3%

4.2%

High

8:30

GBP

Consumer Price Index (MoM) (JUL)

-0.1%

-0.1%

Medium

8:30

GBP

Core Consumer Price Index (YoY) (JUL)

3.0%

2.8%

Medium

8:30

GBP

Retail Price Index (JUL)

234.7

235.2

Low

8:30

GBP

Retail Price Index (YoY) (JUL)

5.0%

5.0%

Low

8:30

GBP

Retail Price Index (MoM) (JUL)

-0.2%

0.0%

Low

8:30

GBP

RPI Ex Mort Int.Payments (YoY) (JUL)

5.1%

5.0%

Low

9:00

EUR

Euro-Zone GDP s.a. (YoY) (2Q A)

-

2.5%

High

9:00

EUR

Euro-Zone GDP s.a. (QoQ) (2Q A)

0.3%

0.8%

Medium

9:00

EUR

Euro-Zone Trade Balance s.a. (€) (JUN)

0.0B

-0.6B

Low

9:00

EUR

Euro-Zone Trade Balance (€) (JUN)

1.1B

0.0B

Low

14:00

EUR

Merkel, Sarkozy Meet to Discuss Debt Crisis

-

-

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.4288

1.4539

GBPUSD

1.6199

1.6447

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