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EUR/USD Awaits Sarkozy/Merkel Summit

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  • German GDP misses badly sinking Euro, stocks
  • UK CPI bit hotter than forecast
  • Nikkei up 0.23% Europe of -2.28%
  • Oil At $86.78/bbl
  • Gold at $1760/oz.

Overnight Eco

  • EUR German Gross Domestic Product n.s.a. (YoY) (2Q P) 2.7% vs. 4.3%
  • EUR German Gross Domestic Product w.d.a. (YoY) (2Q P)
  • EUR German Gross Domestic Product s.a. (QoQ) (2Q P)
  • EUR Euro-Zone Gross Domestic Product s.a. (YoY) (2Q A)
  • EUR Euro-Zone Gross Domestic Product s.a. (QoQ) (2Q A)
  • GBP Consumer Price Index (YoY) (JUL) 4.4% vs. 4.3%
  • GBP Consumer Price Index (MoM) (JUL) 0.0% vs. -0.1%
  • GBP Retail Price Index (JUL) 5% vs. 5%

Event Risk on Tap

  • USD Housing Starts (JUL) expected at 608K
  • USD Building Permits (JUL) expected at 605K
  • USD Industrial Production (JUL) expected at 0.5%
  • USD Capacity Utilization (JUL) expected at 76.9%
  • CAD Manufacturing Shipments (MoM)

Price Action

  • USD/JPY quiet 76.80
  • AUD/USD corrects back to 1.0400 as risk sells off
  • GBP/USD rallies to 1.6350 after hotter CPI
  • EUR/USD weak German GDP knocks it below 1.4400

The EUR/USD dropped lower by 50 points in the aftermath of the release as the disappointing German data only added to the anxiety surrounding today's summit between French President Nicolas Sarkozy and German Chancellor Angela Merkel. The market is looking for Ms. Merkel to offer greater support for an expansion of the EFSF and ultimately to perhaps even back the idea of a common Eurobond.

The EUR/USD was hit by much weaker than expected German Q2 GDP data at the start of European trade sending both risk FX and regional equity markets sharply lower as traders worried that Europe's largest economy could slow markedly into the second half of the year. German GDP printed at 0.1% versus 0.5%. The annual growth in Q2 slowed to a 2.7% pace from 4.9% rate in Q1. According to Destatis, the Federal Statistics Office German economy has yet to reach pre - 2007 peak growth.

The GDP numbers were preliminary and therefore the composition of the figures was not yet available, but the headline data suggests that domestic spending must have been weaker than forecast as the region's credit crisis had a negative impact on consumer sentiment. Furthermore the disruptions in the global supply chain due to the natural disaster that struck Japan in March, must have also taken their toll on export driven German economy.

Today's weak economic data may make it even more politically difficult for Ms. Merkel to commit German resources for the common good of Europe. Nevertheless, the two leaders clearly realize that a more unified approach is necessary in order to combat the assault of the shorts on the regions various credit markets and if today's meeting culminates in some sort of announcement that hints at a move towards more fiscal unification the EUR/USD could recover its losses

Meanwhile in UK the CPI data printed a bit hotter than expected with annual numbers coming in at 4.4% versus 4.2% eyed. The rise will trigger yet another letter from BoE governor Mervyn King to UK Chancellor of exchequer but UK monetary authorities are likely to continue to insist that the price pressures are temporary and will ameliorate as the year progresses. Cable rose towards the 1.6400 level as the hotter inflation data suggested that MPC members will not be able to resort to any additional QE measures even if UK economy slows into the H2 of 2011.

In North America today the calendar carries a smattering of second tier data including housing starts and Industrial Production, but the focus will be squarely on the other side of the pond as traders await the conclusion of the Merkel/Sarkozy summit. German authorities have tried to dampen expectations of any meaningful policy changes, but the markets are hungry for some substantive results and if the two European leaders fail to provide any fresh news on the issue of EFSF, the EUR/USD could quickly move lower to test the 1.4250 support.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 12:30 8:30 Housing Starts (JUL) 608K 629K
USD 12:30 8:30 Building Permits (JUL) 605K 624K
USD 13:15 9:15 Industrial Production (JUL) 0.5% 0.2%
USD 13:15 9:15 Capacity Utilization (JUL) 76.9% 76.7%
CAD 12:30 8:30 Manufacturing Shipments (MoM) -0.8%

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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