EUR/USD Daily Fundamental Analysis for July 21, 2011

The volatility remained high in the market on Wednesday one day ahead of the summit which kept the EUR/USD fluctuating on expectations for the actions to be taken.

We have reached the focus of the week and Thursday will be the “make or break” decision by Euro Area leaders as Papandreou called it. The expectations are not that upbeat for the leaders to reached a solution yet the euro has been unwinding some losses on eased worries and more confidence that the leaders have no other solution but to reach a final agreement to ensure financial stability.

In a statement ahead of the Brussels summit the European Commission Jose Manuel Barroso said that “Nobody should be under any illusion: The situation is very serious” which is very true and urged the leaders to reach common grounds on measures to sustain Greek public finances, the private sector’s role, the scope of EFSF, repair the banking sector, and measures to ensure the provision of liquidity in the banking system. The wide range of critical topics highlighted where some comfort to the market especially that the Greek finance minister said a decision is “attainable” at the summit and the meeting between Sarkozy and Merkel translated into hope that progress is taking place.

Trading on Thursday will be very choppy and the movement over the coming period will be defined by the decisions made by leaders. The strong decision to salvage Greece and prevent the contagion spread and possible aid the nation while averting a selective default status will surely support the euro strongly.

On the other hand, patchy solutions to the crisis will only give temporal relief for the euro and not sustain the gains. The likelihood for a logical deal by leaders is growing especially as they are running out of options, yet a shaky statement and no decision will be very devastating on the market and might renew the global selloff once again.

The day will also be full of fundamentals from the euro area and the Untied States that will further increase the volatility.

Germany will start with the flash PMI estimate for July at 07:30 GMT where the Manufacturing PMI is expected to slow to 54.0 from 54.6 while the Services PMI is expected to slow to 56.1 from 56.7.

The euro area will release the flash PMI estimate for July at 08:00 GMT, where the manufacturing PMI is expected to slow to 51.5 from 52.0 and the Services PMI expected to slow to 53.3 from 53.7 which will surely pressure the Composite PMI to slow from June’s 53.3.

As well the current account for May is due at the same time and after the narrowing trade deficit the Current Account deficit probably shrunk from April’s seasonally adjusted deficit of 5.1 billion euro.

The US will start Thursday as usual at 12:30 GMT with the weekly jobless claims after they eased the previous week to 405 thousand.

At 14:00 GMT the Leading Indicators for June are due and expected to ease to 0.2% from 0.8%. At the same time the Philadelphia Fed Index for July is also due and expected with improvement to 4.5 rebounding from -7.7.

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