German CPI Due
The euro continues to hug the 1.2500 level against the dollar, unable to break convincingly in either direction as investors continue to weigh the possible outcomes from the EU Summit. Yesterday’s publication of European Council President Van Rompuy’s “vision for the EMU” contained no surprises, and highlighted the importance of a financial and a fiscal union with “greater pooling of decision making on budgets, commensurate with the pooling of risks”. However, as expected, details on how these plans could be implemented were conspicuously absent. EU officials stated that further work “to develop a specific and time-bound road map” may come in a report in December, with an interim report due in October. So for this week, we would expect an agreement only on a broad framework based on the Commission’s proposals, with details hopefully emerging by the next Summit in the autumn. German Chancellor Angela Merkel already expressed her reservations to the proposals, reportedly saying that they have the wrong balance of shared liability and control. Sentiment was certainly not helped by Egan-Jones, which downgraded Germany’s sovereign rating to A+ from AA- (negative outlook) on Tuesday, widening the gap with the major ratings agencies. Though the EURUSD reaction was rather muted, the downgrade will likely magnify fears of further ratings actions in the Eurozone and reinforce Germany’s opposition to any notion of shared liability. In this context, the difficulties involved in finding common ground acceptable to both the creditor and debtor nations of the Eurozone are aplenty, reaffirming the prospect of a lengthy and arduous period of negotiations that will likely keep investors on edge. Against this backdrop, we stick to our 3m and 12m EURUSD forecasts of 1.20 and 1.15, respectively. Elsewhere, in the US, home prices as measured by the S&P/CS index jumped 0.7% m/m in April, while the consumer confidence index slipped to 62.0 in June from 64.4 in May. The focus now shifts to the Merkel-Hollande ‘working dinner’ in Paris later today. Meanwhile, any surprise in Germany’s CPI reading could influence rate cut expectations for next week’s ECB meeting.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank