EU Summit to Fall Short on Debt Crisis but May Surprise on Growth

Talking Points

• EU Leaders’ Summit Unlikely to Yield Breakthrough on Debt Crisis
• Stocks-Linked FX May Rise if Europe Steps Up Pro-Growth Efforts
• German, UK Economic Data Unlikely to Stir Meaningful Volatility

The start of the much-anticipated EU leaders’ summit is firmly in focus. Traders are looking for policymakers to step effortsto contain the debt crisis and boost regional growth. As we described in detail earlier, speculation over recent days has focused on dealing with lingering sovereign debt and bank sector instability. Markets appear relatively skeptical about the ability of policymakers to achieve anything meaningfully actionable on either front, and with good reason. Fiscal reform is a notoriously contentious and slow-moving subject for Eurozone policymakers. Indeed, a recent report from EC President Herman Van Rompuy estimates concrete measures are unlikely to emerge until December.

While that seems to set the stage for disappointment, that need not be the case considering the bar for a successful outcome has been set relatively low. Indeed, the lack of meaningful progress on fiscal reform is unlikely to shock the financial markets. Meanwhile, growth-boosting initiatives are a far less controversial topic, suggesting significant progress on this front may be easier to achieve. A recession in the Eurozone and its consequences for performance in other economies (notably China, and by extension Asia in general) represents the most significant headwind facing global economic growth this year. Consequently, a convincing set of pro-growth measuresthat helps soften the downturn ought to prove supportive for risk appetite.

In practical terms, that stands to boost overtly sentiment-linked currencies like the Australian, Canadian and New Zealand Dollars against the safe-haven US Dollar and Japanese Yen. Importantly, the outcome is unlikely to give much aid to the Euro itself. Indeed, efforts to boost Eurozone growth are likely to dull recessionary forces but won’t dismiss them, meaning ECB rate cut expectations still have scope to build in the weeks and months ahead (particularly as inflation slows). Needless to say, structural sovereign risk concerns would remain as well, keeping a lid on the single currency. Importantly, a summit communiqué will not emerge until Friday, meaning price action is likely to be driven by stray sideline commentary and market speculation in the interim. That opens for choppy volatility in the hours ahead.

On the economic data front, German Unemployment figures headline the docket. Expectations call for the economy to add 3,000 jobs in June after a flat result in the prior month. Traders’ response is likely to be muted, with the Unemployment Rate due to remain unchanged at 6.7 percent and the overall deterioration in jobs growth developing over the past 15 months still firmly in place. The Nationwide gauge of UK House Prices is expected to rise for the second consecutive month. Here too, the release is likely to pass with little fanfare as the British Pound looks to risk appetite as the leading driver of price action. Final revisions of first-quarter UK GDP as well as June’s Eurozone Consumer Confidence figures are also on tap.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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