Two main events will garner most attention this week. These are Fed Chairman Bernanke’s Monetary Policy Report to Congress on Wednesday and the Eurogroup meeting on Friday. Ahead of these events trading is likely to be restrained. While a solid close to US and European equity markets at the end of last week suggest at least a firm start to the week for risk assets the many and varied uncertainties afflicting markets suggest that positive momentum will be very limited. US data should generally outperform compared to Europe this week with June retail sales, July Empire manufacturing, May industrial production and June housing starts are set to post gains. In contrast, the German July ZEW survey is set to decline further.
Wide ranging uncertainties in Europe including the inability to seal the deal on the main elements of the recent EU Summit, downgrade of Italy’s sovereign ratings by Moody’s, uncertainty of Greece’s austerity programme, delay in the German Constitutional Court’s verdict on the ESM bailout fund, the hard line stance of German Chancellor Merkel towards banking supervision, disagreement within France’s majority government on how to ratify the Fiscal Pact as well as objections from the Netherlands and Finland on the use of the rescue funds, highlight just some of the difficulties remaining in turning around confidence in Europe. All of this suggests that the EUR will remain under downward pressure while Eurozone peripheral bond spreads will see limited compression.
Aside from a relatively weak EUR which we expect to push lower initially to support around 1.2151 versus USD and then towards the psychologically important 1.200 other risk / high beta currencies will remain relatively resilient. Asian currencies will likely begin the week in positive mood helped by expectation of more stimulus from China but unless risk appetite improves significantly any upward bias will be limited. Although there may be some disappointment from a lack of progress in Europe on resolving its crisis and also from Bernanke’s testimony in which he is unlikely to indicate a greater bias towards more quantitative easing, risk appetite is unlikely to sour too much, especially given thin summer trading conditions and hopes of more policy stimulus out of China.