Complacency finally fades a bit ahead of key day tomorrow

The recent noteworthy complacency finally faded a bit today as the market is pricing in more risk that things don't turn out well after day 2 of the EU summit. End of month and quarter flows may also be a consideration.

GBP
One might have expected more EURGBP downside today in sympathy with the move in EURUSD, but GBP was also weak on the day, likely due to the LIBOR scandal and Barclay’s getting hit not only with a massive fine, but as much as a 15% loss in its share price today, though the FTSE wasn’t particularly weak vs. its European peers. I wouldn’t expect this news to have lasting consequence for GBP, which will continue to thrive if the EU situation remains nervous. This 0.8000 level in EURGBP and the recent low around 0.7950 are worth watching – if they fall, the next support may not come in until 0.7750. Note how UK politicians are all jostling to look high and mighty on the matter and outraged at this scandal, but let’s all consider where we might have been if Barclays and others hadn’t fixed LIBOR at artificially low levels, when so many trillions of dollars of assets are fixed at spreads vs. LIBOR. This isn’t to excuse the behaviour, only to wonder what the governments might have been faced with on the bail-out front had LIBOR been allowed to explode higher – that’s the real story.

Chart: AUDUSD
The complacency we noted in recent days seems to be fast fading today, and we have a week/month/quarter close tomorrow. AUDUSD today sports quite a pattern reversal that could set up further losses to come if risk appetite remains on the defensive in the wake of the EU summit and the pair follow through lower through the 55-day moving average, currently a ways below parity.

Headline du jour
Here’s a great headline from Bloomberg: “Airbus to Unveil Alabama Aircraft Assembly Line”. There is massive unemployment across the non-core Euro Zone and yet Airbus, a huge European corporation that has been championed and subsidized by European governments over the decades, is locating a large assembly plant in the US? It certainly speaks to the need for the EU periphery to devalue and reform its labour laws...

Looking ahead
We’re not likely to get anything concrete from the EU summit until tomorrow afternoon. It’s important to bear in mind that the German approach is not one of anti-EU, it is one of insisting on tough and clear oversight rules that would entail a significant loss of sovereignty – and also require the austerity that will only ratchet the pain level higher at the periphery, even if the systemic risk of impossibly high bond yields is avoided. Merkel criticizes other EU leaders (and the “Gang of four” proposal of the last couple of days) of going too far in trying to “mutualise” debt while keeping oversight rules too vague. The periphery just wants relief and they see that in immediate moves toward tighter union without having to pay the price now.

Economic Data Highlights

• UK Jun. Nationwide House Prices fell -0.6% MoM and -1.5% YoY vs. +0.1%/-0.6% expected, respectively and vs. -0.7% YoY in May
• Sweden May Trade Balance out at +9.8B vs. +5.0B expected and vs. +4.8B in Apr.
• Germany Jun. Unemployment Change out at +7k vs. +3k expected and +1k in May
• Germany Jun. Unemployment Rate out at 6.8% vs. 56.7% expected and 6.8% in May
• Norway Jun. Unemployment Rate out at 2.4% vs. 2.3% expected and vs. 2.3% in May
• US Weekly Initial Jobless Claims out at 386k vs. 385k expected and 392k last week
• US Weekly Continuing Claims out at 3296k vs. 3280k expected and 3311k last week
• US Weekly Bloomberg Consumer Comfort Survey out at -36.1 vs. -37.9 last week

Upcoming Economic Calendar Highlights (all times GMT)

• US Jun. Kansas City Fed Manufacturing Activity (1500)
• US Fed’s Pianalto to Speak (1530)
• UK BoE’s Weale to Speak (1700)
• New Zealand May Building Permits (2245)
• US Fed’s Fisher to Speak (2300)
• UK Jun. GfK Consumer Confidence (2301)
• Japan May Jobless Rate (2330)
• Japan May Overall Household Spending (2330)
• Japan May National CPI (2330)
• Japan May Industrial Production (2350)