Currency markets are likely shift focus from monetary policy to fiscal strategy this week as Germany prepares to meet with both France and Greece.
Investors will be keen to assess what progress is being made to take forward the European Central Bank’s efforts to diffuse the crisis; however, indications so far do not bode well for the euro or risk appetite.
Focus on economies last week kept traders busy but exchanging currencies at somewhat familiar prices. The eurozone economy contracted just as forecast but details about Europe’s austerity battle which are expected to be announced over the coming weeks may well carry more market-moving weight.
Developments in Europe will inevitably keep the US dollar and Japanese yen moving with traders unlikely to venture too far from their safe haven base. The US dollar is looking particularly strong before this week’s minutes from the Federal Reserve’s earlier monetary policy meeting that are likely to show little enthusiasm for additional quantitative easing.
The British pound is also looking more robust and may continue its recent revival. Friday’s data on Britain’s second quarter growth is expected to show the economy contracting by less than initial estimates stated.
Japan and China will offer very little in terms of data this week but investors will study PMI surveys from the euro area on Thursday which will no doubt keep the global growth story moving.
The pound may add to the strength it has shown recently in front of this week’s revised growth data that is expected to show the British economy contracted by a smaller margin than first thought.
Initial estimates revealed a disappointing -0.7% GDP print for the second quarter but consensus amongst economists is that the figure will now be revised up to -0.5% for the April to June period. The revisions are due for release on Friday and government spending data and another retail sales report should keep traders busy in the interim period.
Last week’s less dovish than expected Bank of England minutes and stronger official retail sales data has given the pound a relatively sturdy platform to work from this week. Unless upcoming statistics deliver any new surprises about the economy’s health, sterling could add to gains which have seen the British currency climb to one-month highs against the Japanese yen.
The US dollar is facing another busy week despite the US market offering a calendar lacking any blockbuster economic data releases.
The spotlight is therefore likely to shine bright on the eurozone with traders looking to see what new efforts governments are planning to put forward that may help Spain avoid a Greece-like rescue. Disappointment in Europe could restore the US dollar’s safety appeal following the currency’s somewhat weak finish on Friday.
The greenback fell after confidence-boosting comments from Germany helped revive demand for the US dollar’s more risky rivals.
The euro is set for another potentially volatile few days with investors keen to assess what progress governments are making to help the European Central Bank dissolve the region’s fiscal crisis.
Germany is due to meet with both Greece and France this week and it seems that discussions could be arranged around Athens’ latest plea for a bailout extension.
If investors feel Europe has taken yet another backward step in order to bring Greece back in line, confidence in the euro could disappear quickly. Markets are already feeling uneasy before Thursday’s PMI surveys which are forecast to show key industries within the euro area shrinking for the sixth consecutive month.
Sub-standard second quarter Japanese growth data last week has put markets back on alert about what new measures the Bank of Japan might adopt to speed up the economy as well as weaken the yen’s export-crimping strength.
Those concerns have forced the yen to one-month lows against both the US dollar and British pound and the Japanese currency’s outlook this week against its most traded counterparts is looking uncomfortable.
Declining worries about the US economy has also shifted the balance of power in government bond back markets back towards North America which is a trend that influencing currency markets in much the same way.