European Discord Threatens Further Euro Losses as UK CPI Awaits

Europe discord threatens further euro losses, UK data set to show inflation steadied, while weak pound sees no change in trade deficit, German June CPI matches May's at 2.4%, Japan leaves rate policy unchanged, FOMC minutes.

Continued discord amongst EU leaders with respect to the best way to resolve the current crisis in Europe continues to undermine confidence in the single currency. Talk of voluntary private sector participation appears to have run into a cul-de-sac. With Germany refusing to guarantee peripheral bonds and the ECB refusing to buy them a solution looks a long way away.

As a result Spanish and Italian 10 year bond yields have surged to dangerous levels for both countries, 6% for Spain and 5.7% for Italy.

Hopefully todays resumption of the meeting yesterday will come up with something more tangible than the discord that saw the meeting break up last night, with a vague promise to enhance and improve the flexibility of the EFSF. This could be in the form of using bond buybacks to ease Greeces debt burden according to Olli Rehn.

UK inflation data for June is due out and is unlikely to offer much in the way of comfort to Mervyn King and his MPC cohorts with CPI expected to remain at 4.5%, with core at 3.3%. RPI is also not expected to slip back wither remaining at 5.3%. These figures will bring the inevitable call for a rise in interest rates and also bring about the response that a rise in rates would kill off any recovery. The weak pound isnt expected to have helped with respect to the May Trade balance data either with expectations that the deficit would remain around the 7.3bn mark.

Before the UK data, German CPI data for June was unrevised unchanged m/m, and rose 2.4% y/y from May's +2.4% .

The Japanese rate decision overnight didnt offer much in the way of surprises leaving rates unchanged, however it cut its growth forecast for the fiscal year to 0.4%, from 0.6% but was slightly more upbeat about its economic assessment as the economy recovers from the after effects of the March earthquake and tsunami.

In the US the May trade numbers are also expected to remain elevated, around $44bn, while the release of the latest FOMC minutes isnt likely to offer too many clues about future policy steps from this months Fed meeting.