Today, a battery of economic data is coming from Europe. UK CPI figures were the first to be released in the morning. Analysts’ expectations consolidated around a reading of 3.0% for the month of May. Even though, numbers came slightly below what market participants were expecting, Bank of England remains under pressure as it continues to adhere to its dovish monetary policy despite the emerging inflationary pressure. But since Britain’s central bank just announced new credit-loan program, which will probably be funded with new liquidity creation similar to the quantitative easing, we are unlikely to see a rise in the benchmark rate in the near term. This will keep the British pound capped in the near-term. Bearing the aforementioned in mind, we see the change in risk appetite as a more significant driver of price volatility in the Tuesday session, before tomorrow’s Minutes from June’s Bank of England meeting are released.
Data was also released from Germany, where the ZEW institute indicator of investor confidence came much worse than the reading analysts were expecting. Economists’ expectations suggested the headline index will decline to 3.8 in June, after advancing for two consecutive months. Instead, the number came in negative, indicating that market participants have turned pessimistic about the economy. This is the first negative reading for the economic sentiment since January of this year. The outcome may be seen as a reminder that aside from generating financial market instability, the Eurozone debt problems are a major drag on global growth. The economy of the currency block, which represents one-fifth of the world’s GDP, is likely to contract in the calendar year. If this happens, we will probably see an increase in the demand for safe-haven currencies including US dollar and Japanese yen, while demand for the euro will remain subdued, building expectations for ECB rate cut among investors.
Other events that investors are watching closely, are the negotiations to form a government in Greece and the discussions in the second day of the G20 summit in Mexico. The developments around both of these events have the potential to change the risk sentiment of market participants and thereby to influence the movement of major currencies. In Athens, New Democracy leader Antonis Samaras seems to have secured the support of the Pasok party, which would give the pro-bailout block enough seats in parliament to form a government. At the G20 meeting, the main topic continues to revolve around be Euro area problems as countries outside the region try to pressure the EU to handle its problems as quickly as possible. It remains to be seen if anything concrete will be negotiated after the meeting, but investors hope for some guidance ahead of the more important EU leaders’ summit, which is scheduled for the second half of next week.
The information in this analysis is collected from different sources and should serve for informative purposes only. The author shall not be held responsible for the validity of the presented information. No part of this analysis recommends the purchase or sale of a currency pair or any other financial instrument.