UK CPI Lower, Market Turns To US Trade Balance

Risk Off Environment Continues; UK CPI Lower; Market Turns To Trade Balance Data. Also see our LATEST TRADES below.

The Asian session saw a distinctly risk off environment with strong JPY, CHF and USD. Since London open markets have stabilized and trade slightly off their respective lows. UK CPI comes lower than expected. Eurogroup meeting fails to inspire. Market turns to US and Canadian trade balance data and to the latest FOMC minutes.

The Eurogroup meeting failed to calm the markets and inspire confidence. The major issue is that Euro zone leaders did not agree on any specific details. There was a talk that the EFSF would be expanded, maturities would be lengthened and interest rates would be lowered. All options are still on the table but no commitments were made.

Other troubling news include the Bank of Portugal downgrading its economic outlook stating that austerity measures will have a severe impact on growth and employment and also news printed in Spanish newspaper ABC that said that six Spanish bank will fail the Bank Stress Test.

Over the last few sessions markets have been focusing on Italy. The 100+ point bounce in EURUSD can be attributed to news that the Italian opposition calls for the approval of austerity measures in Senate by Thursday. Rare gesture of unity indeed.

On data front, UK June CPI surprised with a lower print. On monthly basis CPI printed -0.1% vs. +0.2% which translates to 4.2% y/y from last 4.5%. GBPUSD weakened significantly after the release of this news.

New York session starts at 8:30 am ET with May Current Account balance data for Canada and the US. Canadian Trade deficit is expected to narrow slightly to CAD 0.8bln from previous 0.9bln. The deficit has been widening each month over the past four months.

Majority of traders are likely to concentrate on trade balance of the US. May deficit is expected to increase only slightly to USD 44.1 bln from previous USD 43.7 bln. Last Saturday Chinese trade balance showed surplus that was much larger than expected (USD 22.3bln vs. exp. USD 14.1bln) so it is likely that US trade deficit will widen to reflect this.

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FOMC minutes from June meeting are due at 2:00 pm ET. The market will search for clues regarding monetary policy and the possibility of an additional round of QE or other type of easing (rate caps on 2-3 year or 10 year bond). The market will probably not react much to this event as most details were already covered in the press conference right after the rate decision.