EURUSD - ECB vs Portugal

The euro gave away a significant portion of gains from the previous week and the Moody’s decision on Portugal is certainly to blame here. Investors generally hoped that fiscal issues will be shelved – at least for a couple of weeks. Portugal obviously was on the radar (we actually warned about it in a snapshot at the end of June) but markets hoped that the votes in Greece bought some time. Whether Portugal is to be pressed soon remains to be seen (the problem is serious but Portugal still has the money secured for a while) but the euro might find a second enemy this week – a previous ally: ECB.

The Bank is nearly set to rise interest rates today but that is already well priced in, just like another hike in the autumn. The question is, however, at what point will the ECB stop? As recently as April the market saw as many as 4 hikes next year on top of total 3 moves this year, which would bring the reference rate to 2,75%. However, the outlook deteriorated sharply since then: more doubts about the global recovery appeared and fiscal issues escalated again. Therefore, while implementing hikes this year, ECB may tone down expectations (currently for two hikes) for the 2012.

A dovish Trichet would fit the technical picture on the EURUSD well. The pair remains in a triangle and after failing to break to the upside it is declining towards the lower limit around 1,4150.

ADP above expectations?

Investors on equity markets generally shrugged Portugal and weaker US services ISM alike, but may not stay indifferent to the labor market data to be released this week. The key government report is due tomorrow but the ADP is seen as the best gauge and will be released today. There seems to be chance for the market bulls. After a very weak report from the previous month (+38k) the market consensus for June is somewhat conservative (67-70k). Meanwhile, the data we got so far (claims, ISMs) suggest a higher reading – around 100k or even higher. Should it materialize, a bullish sentiment would be strengthened (at least in the short term - in the medium term we still think stocks face a bumpy road mostly because concerns regarding a pace of growth).

Events to watch – ADP, ECB on top of a long list

ADP (8.15 ET, 14.15 CET, consensus +70k) is on top of the list for equities while ECB (decision 7.45 ET, 13.45 CET, consensus +25 bp; conference at 8.30 ET, 14.30 CET) will be the key for the euro. However, the list of important releases is much longer. The report on initial claims will complete a picture of the labor market (8.30 ET, 14.30 CET, consensus 420k). The output numbers will be released in UK (4.30 ET, 10.30 CET, consensus +1,1% m/m) and Germany (6.00 ET, 12.00 CET, consensus +0,6% m/m). The pound will await not only the output but also the BoE decision (7.00 ET, 13.00 CET) even though at the moment the BoE is staying put and investors gauge MPC’s intentions by checking the minutes. Finally there is a Canadian PMI (10.00 ET, 16.00 CET, consensus 65 pts.) and the data on US fuel inventories (11.00 ET, 17.00 CET).      

Przemysław Kwiecień PhD, Chief Economist

Disclaimer, investment risk warning
X-Trade Brokers Dom Maklerski S.A. does not take responsibility for investment decisions made under the influence of the information published on this website. more