Unsurprisingly the closure of the US markets today has subdued conditions in Europe. EUR/USD was a little softer in Asia overnight and has remained range-bound just above its overnight low in London. The Eurozone final PMI composite number was in line with expectations and provided little overall incentive. Sterling, however, was hit by weaker than expected UK June PMI services data.

Money market conditions remain a prime focus for the EUR. Rates across the German curve have eased. However, Euribor is still seeing some upside pressure, though the rate of increase has moderated. The recent reduction in liquidity suggests that Eurozone money market rates could continue to push higher; this could keep the EUR supported. That said this week's ECB policy meeting and press conference should underpin the view that there is little to no risk of an ECB rate hike in the next 12 month or so. The ECB need to tread carefully in withdrawing liquidity so as not to signal higher rates and the present situation implies that there is risk that the ECB re-introduces special measures. This would help soften market reaction if the forthcoming results of stress tests in Eurozone banks provided disappointing results.

While the Eurozone composite PMI provided little overall incentive, the PMI service data for Germany was a little better than expected. Similarly, better than expected May Eurozone retail sales was lifted by an increase in activity in both Germany and France. German labour data have recently improved in line with indications that industrial orders have improved and this is providing decent evidence that Germany's economic recovery is firmly in place. The pick-up in German growth does bring some much needed good news for the EUR. That said, given that the German government have been very reluctant to stimulate internal demand, the benefits to the Eurozone's periphery will arguably not be a great as they should be. An important parliamentary vote on Greek pension reforms this week will keep the focus on the necessary but difficult process of fiscal reform that continues in the periphery of EMU. This combined with the process of stress testing Eurozone banks will continue to feed risk aversion. In contrast to German data much of the recent US economic figures have disappointed with the detail of last week's US non-farm payrolls release also signalling that the US recovery could be losing momentum. Poor US economic data coupled with recent fears that the pace of growth in China could be at a less rapid pace suggest that asset prices may have to re-adjust further to take account of a less optimistic scenario with respect to world growth. Oil prices have broken below the recent uptrend, the AUD and the CAD could also struggle in this environment.

EUR/SEK has pushed higher this morning despite the upward revision by the Swedish government to its 2010 growth forecast (to 3.3%). The Riksbank already hiked rates by 25 bps on July 1. Sterling was softer this morning on the back of a weaker than expected PMI services reading. Fears that further bad economic news will result as the UK government's deficit reduction plan takes a hold continue to weigh on confidence. EUR/GBP found decent resistance at 0.8285, cable found buyers at USD1.5120.

Jane Foley

Research Director FOREX.com jfoley@forex.com +44 207 398 5024   FOREX and other leveraged products involve significant risk of loss and may not be suitable for everyone. FOREX.com is a trading name of GAIN Capital - FOREX.com UK Limited and is authorised and regulated by the Financial Services Authority (FSA FRN 190864)

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