Last week's overview
Currency markets continued to digest the fall out from the European Summit held last week that greed to use ESM funds to recapitalize banks directly and use the bailout funds to purchase government debt. The initial reaction was extremely euro positive and dollar negative, but details over the agreement remainlacking, which weighed on investor confidence by the end of the week.
The decisions taken at the summit will help countries to deal with their debt crisis, but politicians continue to pull up short when dealing with the source of the problems. France was a case in point . The newly elected President was hailed a winner after a ‘growth package’ was agreed to at the summit. However, the French budget for this year has a short-fall that will have to be met with austerity measures or in this case tax increases on the wealthy and oil industry.
The ECB lowered interest rates by 25-basis points, while the BoE increased its QE programme. Activity in currency markets was lower then usual as investors took a wait and see approach.
Europe - Highlights this week
This week is light on economic data, but attention will again be placed on policy developments coming out of the Euro area Finance Ministers' meeting.
Clarity over when the ESM will come on line and when funds will be able to help banks and/or buy government bonds could help lift the euro and weigh on the safe haven US dollar.
UK - Highlights this week
Industrial output and trade figures, which are due out this week, will likely continue to reflect weakness stemming from the euro area debt crisis.
Data released last month showed the manufacturing sector suffering an unexpected decline, particularly in the pharmaceutical industry. The trade figures for April also showed exports slumping as demand from the euro zone waned.
The UK trade deficit rose to its second highest level on record and throws into question whether the economy will be able to avoid a deeper recession in the coming months.
US Highlights this week
The FOMC minutes from the June 20th meeting will be released this week. The minutes will offer some insight over the reasoning behind the Fed’s decision to extend the deadline for ‘Operation Twist.’ The deadline was extended from the end of June until the end of the year in a move which seemed to conflict with economic data at the time as well as the Fed’s Beige Book. Rather the extension to the Fed’s easing policy looked as if the central bank was kowtowing to tightened conditions in financial markets.
Japan - highlights
Key machinery orders, consumer confidence and corporate price data will be released this week prior to the central bank’s meeting. The upgrade in regional growth seen in last week’s survey will allow the central bank an opportunity to keep policy unchanged at this week’s meeting. Drive will continue to come from broader market sentiment.