The bears maintained control across currencies overnight with further downside from risk assets promoting upside for the in-form greenback. Equity markets from both sides of the Atlantic struggled to gain traction with investors remaining transfixed on the European Council meeting in Brussels.

There’s a general lack of enthusiasm surrounding the EU Summit which is expected to provide the “building blocks” for a deeper Euro region integration. Its clear solidarity among leaders and tentative long-term initiatives will not be a crowed pleaser as debt ridden nations such as Spain continue to be driven closer to the edge.

Earlier this week, leaders from Germany, France, Italy and Spain announced a new pro-growth alliance with an estimated €130 billion (representing around 1 percent of GDP) to be set aside to focus on boosting growth and employment. While it may be a worthy exercise to channel funds into investment initiatives, investors remain unconvinced this ‘growth pact’ will be enough to kick-start the economy. Leaders are also light on the detail with questions surrounding the origin of the funding, whether it is ‘recycled’ money already assigned for stimulus programs or newly raised capital.

Economic news overnight saw Gross Domestic Product in the United States rose at an annual rate of 1.9 percent in the first quarter matching expectations but significantly lower than 2011 fourth quarter growth of 3.0 percent. Personal consumption expenditure data showed growth of 2.5 percent in the first quarter slightly lower than the expected 2.7 percent while core expenditure data showed 2.3 percent growth against expectations of 2.1 percent.

Earlier this morning the Australian dollar made a brief break to the downside of US dollar parity, but buying activity around the figure won out with momentum carrying the local unit to current levels of 100.4 US cents.  The Euro maintained a controlled declined setting a fresh monthly low of $US1.2406 and remains under moderate pressure around current levels of $US1.2440. Economic data today includes local private sector credit and Chinese Industrial profits, both scheduled for release at 11.30am.

Currencies  failed to reflect any decisive direction overnight, with solid gains across European and U.S equity markets failing to translate to any direct upside for the Euro and a mixed performance across the commodity bloc. European stocks showed a sense of optimism ahead of the summit overnight with the DAX and CAD finishing 1.5 and 1.67 higher, but the Euro told a decidedly different story with price action capped below $US1.25-figure. Downside pressure on the Euro was maintained throughout the session with the $US1.2440 region once again providing support. A lower than expected CPI print in Germany has also provided further weight to the argument the ECB will ease monetary policy at next week’s meeting. Southern European debt markets also maintained a less than inspiring outlook with Spanish bond yields edging closer to the 7 percent region, despite a solid day across equity markets.

The anticipation ahead of this week’s European Council meeting maybe high, but it’s clear the bar has been set low with the broad market consensus suggesting we’re unlikely to see anything groundbreaking to induce a meaningful near-term rebound across the risk spectrum. With German Chancellor Angela Merkel remaining steadfastly opposed to jointly issue debt in the form of Eurobonds, investors are hoping Germany will at least ease their resistance to other initiatives such as allowing the EFSF/ESM rescue funds to buy distressed government debt.

Across the Atlantic, U.S markets found solace in stronger than expected home sales data with the positive lead from European equities also providing a solid platform for gains. New home sales rose at a yearly pace of 15.3 percent beating analysts’ estimates of a 10 percent rise. Durable goods orders rebounded more than anticipated in May rising 1.1 percent against expectations of a 0.5 percent rise.

The Australian dollar traded in a tight 35 pip range overnight with price action unable to break through previous resistance around the 100.85/9 US cent levels. Still the Aussie recorded modest gains against its major counterparts with strength against Sterling and Japanese Yen leading the charge higher. Conjecture over the possibility of near-term policy easing from China has also provided a mild upside bias for the Aussie dollar. Mid-tier data on the local docket today includes the HIA New homes sales data.

Despite general support across high yielding currencies, the Euro remained out of favor overnight with the assistance of ratings agency Eagan Jones which downgraded Germany from AA- to A+. Investors are also transfixed on the EU Summit at the end of the week and the Euro’s reluctance to grind higher suggests expectations are low. Should markets keep the status quo ahead of the event, it may present upside value for the Euro if European leaders – at the very least – produce any solid growth initiatives. For now we’ve seen a divergence from the Euro against its risk counterparts with the EURAUD pair maintaining a downward trajectory. Support for the Euro kicked in around the $US1.2440 level but remained under pressure below $US1.25-figure.

The cost of Spanish government debt remained a negative focus across markets with an auction of 3-month bills demanding a yield of 2.362 percent, a considerable difference to 0.846 percent last month. It’s evident the ability for Spain to raise cash in the traditional form is becoming unsustainable with the nation essentially being shut out of the debt markets. Although Spain has formerly sought financial assistance to recapitalize its stressed banking system, the risk of a sovereign bailout is growing by the day, placing European leaders under further pressure to come up with a palatable blueprint at this week’s summit.

After sliding on Tuesday, U.S stocks staged a modest comeback overnight but the general lack of optimism surrounding the EU summit later this week kept gains in check. The DOW and S&P closed 0.26 and 0.48 percent higher respectively.

Economic data from the U.S showed the S&P/Case Shiller Housing Index rose modestly in April while U.S consumer confidence fell to an index level of 62 in June against an expected print of 63.

Support was maintained for the Aussie dollar which stabalised above US dollar parity rising to highs of 100.85 US cents with parity acting as short-term support. With no local event risk scheduled for today, we expect the local unit to adhere to these technical levels throughout the domestic trade. At the time of writing the Australian dollar is buying 100.6 US cents.

The Island of Cyprus became the latest European nation to formerly request financial aid overnight with the contagion effects from neighboring Greece finally taking its toll. In a Statement the Government noted “The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill over effects through its financial sector, due to its large exposure in the Greek economy.” Although analysts expect Cyprus will need to tap the EFSF for a relatively small EUR4-6 billion compared to that of significantly larger needs for Greece, Ireland, Portugal and Spain – it’s a testament to the challenges smaller Euro-region countries are facing given the contagion effects of its larger neighbors.

Meanwhile, the set-backs continue to come thick and fast for Greece with Finance Minister Vassilis Rapanos resigning for health reasons. Prime Minister Antonis Samaras who has also been hospitalised this week for eye surgery is not expected to be present at the EU Summit which begins on Thursday.

European equities recorded solid losses with the DAX and CAC sliding 2.09 and 2.24 percent respectively. After signs of positive momentum at the end of last week, Spanish government bonds slid overnight with corresponding yields rising across the curve. Spanish debt yields of a 10-yr maturity bounced off lasts weeks close of 6.25 percent to around 6.6 percent over the course of the session with investors flocking to the safety of German bunds. Spain has now formerly requested financial aid in order to recapitalize its struggling banking sector with a capacity of up to EUR100-billion able to be borrowed on a conditional basis.

It appears market participants are setting the bar low ahead of the EU Summit in Brussels this week with global equities and high-beta currencies resuming a south bound trajectory. The Euro made a break to the downside of $US1.25-figure overnight falling to lows of $US1.2470 before moderate buying kicked-in with commodity currencies the AUD and NZD following a similar path. The sell-off across risk barometers such as U.S equities had clear implications for the Aussie dollar which fell to lows of 99.68 US cents but has since squeezed out mild gains and remains slightly above US dollar parity. In typical risk-off fashion, the U.S dollar outperformed its major counterparts with the Japanese Yen the only major rival to gain the upper hand with the USDJPY pair sliding back below Y80-figure.

In the absence of local economic feedback, we anticipate regional equities to provide the direction for currencies in domestic trade and Assistant RBA Governor (Financial Markets) Guy Debelle will today be a panel discussant at the Mortgage and Finance Association of Australia in Adelaide.