EUR USD June 26 Markets Anxiously Await EU Summit

EUR/USD    is  showing some choppiness, reflecting market  nervousness.  At an EU summit scheduled later this week, European leaders  will be discussing a range of topics,  including  the possibility of a  cross-border banking union and closer integration of their budgets. Meanwhile, the Moody’s ratings agency downgraded 28 Spanish banks  on Monday, which is putting further pressure on the euro. There are government bond auctions today in Spain and Italy. German Consumer Climate came in just above the market forecast, ending a string of weak German releases. In the US, CB Consumer Confidence, a key index, will be released later today.

Here’s an update on technicals, fundamentals and what’s going on in the markets.

EUR/USD Technicals

• Asian session: Euro/dollar  moved upwards, crossing the 1.25 line and reaching a high of 1.2524.  The pair  then consolidated at 1.2510.  In  the  European session,  EUR/USD has been choppy, and was trading at 1.2514.

 Further levels in both directions: Below: 1.2440, 1.24, 1.2330, 1.2288, and 1.22.

Above: 1.2520, 1.2587, 1.2660, 1.2760, 1.2814 and 1.2873, 1.29 and 1.2960.

• 1.2440 is still far, but it proved its strength in the past.
• 1.2520 is fluid, and providing weak resistance.

Euro/Dollar  slightly  choppy as market eye EU  Summit  – click on the graph to enlarge.    

EUR/USD Fundamentals

• 6:00 GfK German Consumer Climate. Exp. +5.7K. Actual +5.8K.
• 8:00 Italian Retail Sales. Exp. -1.6%. Actual -0.6%.
• 13:00 US S&P/CS Composite-20 HPI. Exp. -2.4%.  
• 14:00 US CB Consumer Confidence. Exp. +63.8 points. See how to trade this event with USD/JPY.
• 14:00 US Richmond Manufacturing Index. Exp. +5  points.

For more events and lines, see the Euro to dollar forecast

EUR/USD Sentiment

• EU Summit Awaited: On Thursday and Friday, leaders of all 27 EU countries will meet  in Brussels for  a critical  economic summit. The leaders are under pressure to take some concrete steps,  and there will be discussions about a European banking union and an integrated budget policy. However, there are already too many issues on the agenda, and a swift resolution has little chance. Germany is more and more isolated in the international scene: the G-20 summit didn’t provide any calming message, as Germany remained tough on measures to shore up the zone. Merkel is also under pressure from the German supreme court, which delays the ESM. The euro might strengthen towards the event but fall afterwards. See 4 reasons to expect a disappointment.
• Spain submits formal aid request: As expected, Spain is sending an official letter in request for aid today. Yields on Spanish 10 year bonds resumed their rises (to 6.50%) in the new week, after falling nicely on the the hopes that the bailout funds could buy Spanish bonds directly. An independent assessment discussed a shortage of only 62 billion euros in the worst case scenario As with the bailout announcement, that had 8 holes, also this assessment seems short of mark and could certainly be revised to  the upside. Spanish banks are not famous for their transparency.    Adding to  Spain’s woes,  the Moody’s ratings agency downgraded 28 Spanish banks on Monday.
• Chinese numbers hiding real picture: The New York Times reports that electricity consumption data, which is often considered a reliable measure of the economy, has been played with, and that the real picture is worse. The critical manufactuing industry continues to churn out disappointing numbers – the sector has been contracting since late last year. This boosts the safe haven dollar as well.
• Greek leadership recovering: Prime Minister Samaras and his new finance minister were hospitalized due to different reasons. They will not attend the EU Summit, and more importantly, this delays the visit of the EU / ECB / IMF troika which is supposed to decide on the next trance of aid. Before entering hospital the new government presented a long list of changes to the bailout program. The EU, particularly Germany, will have to show some flexibility on the bailout terms if it is serious about keeping Greece in the EZ. There are discussions of extending the Greek targets, but Greece is likely to miss those as well. The new Greek government finds itself between a rock and a hard place, trying to  comply with its bailout obligations while easing the tremedous economic hardships which the Greek populace is facing.
• No QE in US: After the Fed decided not to introduce QE, but did announce that it would extend Operation Twist, Bernanke’s words convinced some analysts that QE3 is just one meeting away. However, the mood has significantly changed now. Dollar printing fuels the price of oil. Without QE3, we see WTI falling below $80. This also helps the dollar.
• ECB Lowers Collateral Demands: The European Central Bank decided to lower the grade of bonds it accepts as collateral, adapting itself to the falling ratings of European countries. This move was heavily criticized by the German Bundesbank. This objection shows that any new move will be limited. Chancellor Merkel  spoke more forcefully against  the idea of common Eurobonds to help indebted nations, calling it “economically wrong”.
• Contagion to Germany and France?: One more important German survey is waiting, but data so far has been awful: the ZEW Economic Sentiment PMIs both fell below the market forecast. The once invincible German economy appears to be sputtering, and this could spell disaster for the Euro-zone. French banks are heavily exposed to Greek and Italy debt, and are watching with dread the  turmoil in Spain.  President Holland is strongly pushing a  European bank union, and wants immediate recapitalisation of banks from euro zone  rescue funds,   which Germany is firmly against. We could see some sharper disagreements between these two powerful neighbors.    
• Italy’s Monti sets alarms: The Italian PM Mario Monti asks for help from the Germans and the ECB as the situation deteriorates. The Euro-zone’s third largest economy is also suffering from a problematic banking system. This may explode later on. The economy isn’t doing much better, as GDP is squeezing fast. Italy cannot hide behind Spain for too long. If the economy continues to deteriorate, Italy could be the next EZ member to hop onto the bailout bandwagon.