Talking Points

• US Dollar Soars as Risk Aversion Returns Ahead of EU Leaders’ Summit
• European Officials Must Convince Markets Budget Rules to be Enforced
• German Inflation to Hit 1-Year Low in January, Italy to Hold Bond Sale

The US Dollar soared in overnight trade, bolstered by safe-haven demand as Asian equity exchanges and S&P 500 stock index futures plunged amid anxiety ahead of the much-anticipated EU leaders’ summit set to begin in Brussels at 14:00 GMT. A press conference with the results of the sit-down is loosely expected at 18:00 GMT according to the news wires. The stocks-linked Australian Dollar underperformed, down nearly a full percentage point against its US namesake.

Policymakers are attempting to complete the dual objectives of sorting out the now almost-mythical “fiscal compact” meant to institutionalize budget discipline the region and securing agreement on private-sector involvement (PSI) in the second Greek bailout, where the government and the banks have locked horns over a variety of technical details including the coupon rate on new longer-dated bonds to be swapped in for outstanding ones.

To call the outing a success, officials will need to convince the markets they’ve established a framework that can be implemented swiftly while still being sufficiently tough on offenders to be credible. Indeed, budget deficit limits have long been a part of EU governance as part of the Stability and Growth Pact, only to be roundly ignored even by the likes of Germany. With that in mind, whatever treaty emerges now will have to put to rest fears of a similar problem going forward.

Against this backdrop, Italy will hold a bond auction to sell debt spread out across 2016-2022 maturities. Average yield and bid-to-cover readings will prove of interest, but the auction’s outcome is unlikely to generate much interest in the near term with the EU summit clearly the larger bit of event risk. On the data front, the preliminary set of German CPI figures is expected to put headline inflation at 2 percent, the lowest in a year.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com