Despite moderate gains across risk currencies last week, the Euro’s fortunes were marred by continued adversity across the Euro area, with the shared currency outpaced by both the greenback and its high-beta counterparts. The Euro closed the week at fresh two-year lows against the greenback with a succession of Euro-era lows recorded throughout the week against the Australian dollar, while falling to near 12-year lows against the Yen. The approval of Spain’s banking bailout on Friday failed to allay broader concerns the nation may be next in line to seek a bailout, after the city of Valencia formally requested financial aid from Spain’s internal government rescue fund. Spanish 10-yr bond yields spiked beyond the 7 percent region, while 5 and 30-yr yields climbed to Euro-era highs, prompting wide spread concerns that Spain will be the next on the list of bailout casualties. The Euro has kicked off the week with deeper losses against the greenback with price action now at fresh 2-year lows while forging new 12-year lows against the Yen.
Among the usual headline risk flowing from the region, the macro week ahead will see the regions flagship economy Germany take centre stage with IFO series of economic conditions and preliminary inflation data for July on the agenda. Earlier in the week the European Commission will release Euro-Zone preliminary consumer confidence data which is forecast to show morale remains low at -20, slightly lower than -19.8 in June. The Markit Economics gauge of Services and Manufacturing PMI for Germany and the Euro area will also be an important driver of sentiment on Tuesday.
Across the Atlantic, FX trends will be governed by the release of U.S GDP which is expected to record annual growth of 1.4 percent in Q2 from a previous 1.9 percent, while personal consumption data accompanying the release is expected to slide to 1.4 percent in the second quarter, from previous growth of 2.5 percent. Also on the docket this week is Markit preliminary PMI on Tuesday, Durable goods orders on Wednesday and University of Michigan consumer confidence later on Friday, while the health of the ailing housing sector will get the usual degree of attention with the release of new home sales data. We’ve also seen U.S corporate earnings play an important role in recent sessions, providing intermittent support for U.S equity markets and sentiment alike. Corporate America will remain a primary directive this week with heavy weights such as Apple and Facebook due to release earnings.
The local week ahead will see the focus turn to Wednesday’s much anticipated release of second-quarter consumer price data. Headline inflation is expected to rise 0.6 percent in the second quarter, representing annual growth of 1.3 percent, from a previous 1.6 percent. The Reserve Banks preferred measures of inflation which excludes the most volatile prices on the scale, is forecast to rise 0.6 percent on quarter to represent annual growth of 1.9 percent – below the RBA’s 2-3 percent target range. While slower consumer price growth provides further breathing space for the RBA, it’s unlikely represent the smoking gun to prompt Stevens and Co to follow-up with an interest cut at their next policy meeting. July’s minutes provided a slightly more hawkish tone than anticipated, with members noting signs the domestic economy has improved, while “growth in domestic activity in China may not be slowing much further.” In essence, with the impact of previous reductions of the cash rate yet to fully infiltrate the economy, relative stability both locally and abroad has now provided the RBA the time to further assess forthcoming data points, with this week’s CPI print the primary focus. A speech by RBA Governor Glenn Stevens on Tuesday will also be watched closely for any clues ahead of the next policy meeting. Local factors aside, risk sentiment from abroad will remain a dominate factor this week, with U.S corporate earnings and quantitative easing expectations to dictate demand for the U.S dollar, and by default the local unit. Expect further conjecture over near-term easing prospects from China this week with the closely watched HSBC flash Manufacturing PMI (JULY) due for release on Tuesday.