The market sentiment turned to be dovish in the beginning of this week with growing concerns about the direct buying of bonds through the ESM and whether or not the size of buying will be enough for recapitalize the EU banking sectors.

While it seems that there are political criticism against this action which can be costly and not an effective in driving the confidence in solving the crisis with worries in the same time about the collaterals which will be under easier conditions and this is looking initially not welcomed from Netherlands and Finland as an intervention from the ECB by the ESM funds.

The market have seen by the end of last week a positive signs from the EU summit by allowing the ESM to directly sharing in the banking recapitalization under the ECB supervising to deal with the struggling banks directly taking weights off their largely indebted governments back and in the same time the ECB can work in much more active way through this window to recapitalize these banks which suffer from the weak economic activity in EU as they suffer from the EU debt crisis meanwhile.

From another side, US ISM manufacturing index of June has come drastically down falling below 50 in the contracting territory for the first time since July 2009 while the market was waiting for easing to 52 from 53.5 in May reflecting negative market conditions currently because of the crisis in EU and the deterioration of the demand which drives this sector.

God willing the market focusing will turn to the US labor market now waiting for the release of US ADP Employment change next Thursday which is expected to show adding 97k jobs in June from 133k in May and by the end of the week for the release of US labor report which is expected to show adding 90k out of the farming sector from 69k in May.

While the market will be waiting for the ECB meeting decision next Thursday after the recent meeting last month has watched voting for cutting interest rate but it was not enough to take such decision as its president Mario Draghi has announced in the press conference following that meeting that the decision of keeping the interest rate unchanged at 1% was not unanimously which raised the market expectations of having new stimulating actions specially as the ECB has lowered also its forecasts of growth to be from -0.5% to 0.3% in 2012 and to be from 0% to 2% in 2013 and also the inflation to be from 2.1% to 2.7% y/y in 2012 and to fall below the 2% yearly target of the ECB in 2013 to be from 0.9% to 2.3% y/y.

The single currency has started to give back its recent gains which stopped versus the greenback at 1.2693 by the end of last week trading currently well below 1.25 psychological level again and god willing the pair can meet supporting level now at 1.255 which could hold last Friday and breaking it can be followed by 1.2409 whereas the pair managed to rise last week and breaking it too can open the way for 1.2357 before 1.2286 which could hold the pair decent after US non-farm Payrolls release of May and the breaking of it can lead again to 1.2151 which its breaking can open the way for 1.1876 again whereas the pair has rebounded forming its bottom on 7th of June 2010 which drove the pair later to reach 1.4939 on 4th of May 2011 whereas the pair has started easing back again while the pair way up can be met by resisting level now at 1.2693 before at 1.2748 which has been reached after the recent parliament elections in Greece again 2 weeks ago but the single currency failed to continue rising versus the greenback over it while crossing above it can be met by a higher resistance at 1.2822 before the psychological level at 1.30 which its breaking can open the way for more resisting levels at 1.3063, 1.3180 and this can be followed by 1.3281 which its breaking can open the way to 1.3384 again before 1.3489 whereas it has formed its recent top and in the case of breaking 1.3489.

Kind Regards

FX Market Strategist
Walid Salah El Din