Euro Sold as Markets Brace for EU Summit, Major Progress Unlikely

The Euro fell overnight on fears that EU leaders gathered for a summit in Brussels will fall short of a major breakthrough on key issues including Greece and Spain.

Talking Points

• US Dollar Corrects Higher Overnight on Pre-Summit Eurozone Jitters
• EU Leaders Unlikely to Remove Lingering Spain, Greece Uncertainty
• Another Batch of Firm US Economic Data May Reboot Risk Appetite

The US Dollar staged a recovery in overnight trade, adding 0.2 percent on average against its top counterparts. The move appeared corrective as markets digested the greenback’s plunge over the preceding 24 hours that pushed the benchmark currency to the lowest level in three weeks. Eurozone debt crisis jitters likely helped as well as traders braced for the beginning of the EU Leaders’ Summit today in Brussels. Spreads between 10-year bond yields for the so-called “PIIGS” and their benchmark German counterparts are trading wider in late Asian trade, pointing to a pickup in funding stress. Indeed, the Euro underperformed relative to the other majors amid the broader Dollar advance.

Expectations for the sit-down have been dutifully downplayed by regional officials over recent days. The likelihood of a bailout agreement with Spain appears remote as German officials insist additional conditions beyond existing austerity measures would apply, a position that may be a deal-breaker for the government of Mariano Rajoy. Meanwhile, the spectrum of Eurozone big-wigs have said over recent weeks that a decision on disbursement of the latest tranche of Greek bailout cash will have to wait for the report of “troika” inspectors on Athens’ budget-cutting progress. That is not due until early November, so clear guidance on this front likewise seems unlikely. Still, traders will keep an eye on any sideline commentary that helps illuminate the trajectory of negotiations.

Later in the day, the spotlight returns to the US economic calendar. October’s Philadelphia Fed gauge of manufacturing activity and September’s Leading Indicators composite are on tap. Improvements are expected on both fronts. This may reboot the recovery in risk appetite seen over the past two days amid hopes that improved performance in the world’s top economy will help offset sluggish performance in Europe and Asia. Such an outcome threatens to reboot selling pressure on the US Dollar as haven-seeking capital flows reverse course.

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 Ilya on Twitter at @IlyaSpivak

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