The euro has been knocked slightly lower by weaker-than-expected growth figures coming out of Germany. The softer French data seen earlier coupled with the release from Germany does not bode well for eurozone GDP data that is due out. While the figures could help to weaken the euro, euro losses are likely to be limited in the run-up to the press conference between Angela Merkel and Nicolas Sarkozy, which will be the primary focus for currency markets. In the meantime, UK consumer price data will also be released and could prompt trade in sterling, although negative monthly figures will help to bring down the outlook for the annual rate of inflation and likely limit the need for higher interest rates. Currency markets will also keep an eye out for the development in Switzerland where the Cabinet meeting could determine the fate of the Swiss franc as the country tries to come to grips with its currency’s appreciation. In the US, economic data is expected to continue showing a slow housing market in the form of housing starts, while industrial output figures are forecast to rise.

Sterling

Sterling traded mostly higher against the US dollar, while maintaining a tighter range against the euro. Comments from one Bank of England MPC member suggest there is limited chance to see further quantitative easing measures despite a softer outlook on UK economic growth.

US dollar

The New York regional manufacturing index fell into negative territory for the third consecutive month. The release confounded expectations for a pick-up in the data and reflects a weaker state of affairs for the manufacturing sector. At the same time, data released by the US Treasury showed that private investors divested in June of some $18.3 billion worth of Treasury bonds. The amount of the sale was a record, but it was also offset by sovereign purchases, primarily from China, who buys Treasury bonds as a means of weakening its currency.

Euro

There is rife speculation that Ms Merkel and Mr Sarkozy will be forced to talk about potentially developing euro bonds, which would force EU countries to collectively guarantee debt from all EU members. Spokesmen from both leaders have denied that the policy measure is on the agenda. However, the current measures of controlling the debt crisis are failing and that is prompting speculation over the possibility over engaging in such ideas.

Japanese yen

The yen continues to see flat trade in the Asian session despite a mixed session for equity markets. Most Asian equity markets are trading in higher territory, but a ratings agency threat to lower the country’s sovereign debt rating within months if the government is not able to commit to debt reduction measures did not go unnoticed.

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