Euro elite declare 'pro-growth' alliance

In an effort to contain Europe's never-ending crisis, leaders from the four largest Euro-zone economies have agreed on a need for new initiatives to boost growth in the region. With the finer details to be discussed at this week's European Summit, Leaders from Germany, France, Italy and Spain announced a new pro-growth alliance with an estimated €130 billion to be set aside to focus on boosting growth and employment. Although this represents a slight shift from the German led 'austerity first' approach, it's unlikely to see a complete u-turn from German Chancellor Angela Merkel who remains opposed to initiatives such as Euro-bonds and the use of designated rescue funds to buy the distressed government debt of Southern European economies. This week's EU Summit is also expected to provide further detail on efforts to build tighter fiscal and banking unity across the region among other initiatives such as increased funding for the European Investment Bank to finance infrastructure investment. The European Council is scheduled to reconvene on June 28-29. Meanwhile, German Chancellor Merkel and French President Francois Hollande will meet ahead of the summit in an attempt to find common ground and expedite agreed measures. Still, it's expected Hollande's push to implement jointly issued government debt will fall on deaf ears with Merkel making abundantly clear her opposition to such initiatives.

Euro fails to sustain gains despite closure to Greece's political woes

After weeks of extreme uncertainty surrounding Greece's ability to elect a cohesive government, it seems closure to Greece's political woes was still not enough for the Euro to make a meaningful upside correction. The EURUSD pair finished the week in negative territory despite the favourable election result and a significant drop in Spanish borrowing costs on Friday. After peaking to Euro-era highs above the 'bailout zone' of 7 percent on Monday, yields of a 10yr maturity recorded a significant drop on Friday finishing the week at 6.25 percent. The Euro failed to key off debt markets and moderate gains across U.S equities with price action capped below $US1.2585/90 which has in the past proved to be pivotal from a short-term perspective. Taking into consideration the aforementioned 'pro-growth alliance' and the European Summit at the end of the week, one would expect to see investors adapt a neutral stance ahead of such event risk, which implies we may see a bounce on Monday and subsequent short-covering early in the week. Also watched this week will be inflation and unemployment data from Germany.

Australian dollar at the mercy of global risk trends

After a solid start, the Aussie dollar resumed a downward trajectory late last week with a succession of negative themes inducing a sell-off across the risk spectrum. Less than inspiring manufacturing data from China, Europe and the United States halted upside momentum while a paring back of U.S stimulus expectations provided a negative backdrop. The week ahead may see little in the way of top tier directives locally; however the international calendar will more than compensate for a quiet week on the local front. True to form, headline risk from the Euro region will continue to influence sentiment ahead of the summit, in addition to a reasonably full week from a macro perspective in the United States. After rising to near 1.5 percent highs earlier in the week, the Aussie dollar crossed technical barriers in the latter part of the week before bottoming out at parity. While we expect parity to hold moderate selling pressure at bay in the near-term, it's clear there remains a significant risk of further downside should European leaders fail to produce a palatable solution to combat the latest crisis of confidence. In short, any relief felt early in the week will be tentative at best before European leaders produce their blueprint to avoid what many still expect will see a break-up of the union. Like the Euro, market participants remain net short the Australian dollar which implies - at the very least - reluctant upside on short-covering ahead of the EU meeting.

U.S dollar outperforms as stimulus bets unwind

The U.S dollar enjoyed a meaningful late week rally with markets largely unfulfilled by the Fed's decision to extend operation twist. This reversal suggests markets have recalibrated expectations of any new stimulus initiatives, specifically a third round of quantitative easing. While for many the dream of QE3 remains well and truly alive, it's clear the Federal Reserve is not yet ready to bring out the big guns, with further deterioration in labor conditions the likely catalyst for further action. A new week brings a new set of directives for the greenback with Durable goods; GDP, Personal Consumption Expenditure and University of Michigan Consumer confidence index the top-tier events for the week. Market participants will also be listening closely to Fed Presidents Pianalto, Fisher and Bullard speak on the economy later in the week. While we expect intermittent noise on the back of economic feedback and stimulus conjecture, should the balance of risk continue to err on the side of caution, the greenback remains in a prime position to build on last week's gains.