EUR/usd

The EU leaders greatly surprised the markets this morning. The single currency went through the strongest rally since the beginning of the year. It rose straight by 1.5% and in less than 2 hours broke the level of 1.26 on the publication of the end-of-summit decisions. But let's relate the facts as they actually happened. The pessimism reached its heights yesterday afternoon when a flood of bad news befell the market. It became known that Spain won't be able to finance itself for long with the current yields. The mistrust of the markets is eloquently confirmed by the yield of the Spanish 10-year bonds, which exceeds 7%. Germany published disappointing data on the labour market yesterday. Though unemployment has increased just by 7K in June, the unemployment rate hasn't changed since last December. Before that it was decreasing. In other words, the markets have all the grounds to worry about the end of the employment growth cycle in Germany. What will be to the whole EU economy if the main engine isn't able to pull up the region? Yesterday it was also reported that the Italian producer prices dropped by 0.3% in May down to the annual rate of 2.3%. A day before we had also learnt about the slowdown of the annual inflation rate in Germany down to 1.7%. The inflationary pressure has obviously been eased, despite the weakness of the single currency in the recent months. More and more commentators tend to expect that the ECB will cut the rate by 25bp next week. This month the EU business climate indicator is at the lowest level since the end of 2009. Its release at the beginning of the active European trading yesterday aggravated the weakness of the euro. As a result, EUR/USD fell down to 1.24. However, earlier today it was messaged that EU will allot 120bln to stimulate growth in Europe. The most important announcement was that the leaders agreed to set up a single banking supervisor to be run by the European Central Bank (it's very likely that such widening of the ECB's powers will entail a more active intervention soon). The markets with enthusiasm took the idea of direct bond buying by the aid funds. This scheme won't lead to the growth in the government debt as is now with Greece (though the basic issues there are still connected with government finances), was with Ireland and nearly happened to Spain.

GBP/USD

The enthusiasm boosted by the summit results also led to a surge in the demand for the sterling. As have already been mentioned, this currency is very sensitive to the issues of the Spanish banking sector as Britain is the largest lender of Spain. The optimism in regard to the EU summit actually shields the scandal around Barclays. This bank is accused of the falsification of Libor rates and fined about half million dollars. But it's hardly the final sentence, the American regulator can also impose its penalties.

USD/JPY

Yesterday the Japanese yen threatened to drop below the support level we mentioned in the previous reviews. Nevertheless, the growth in stock exchanges spurred the demand for risky assets and increased borrowings in the yen, which in its turn spilt over in the growth of USD/JPY up to 79.60. The rally stands a good chance to continue if the market optimism persists.  This is quite likely to happen at the beginning of the new quarter, when the trends usually oppose to those that then dominate for the most part of the quarter.

AUD/USD

The aussie couldn't stand aside the market rally:  from the parity, reached yesterday afternoon, it jumped up to the current 1.0170. This is the area of last-week highs. However, the ongoing optimism can drive the Aussie to the area of the April consolidation, i.e. to 1.03. Yet the comparative quiet in the commodity markets can prove to be a deterrent. You see, the global inflation slowdown doesn't contribute to the support of gold. It means that the Aussie can cease to be as attractive as it was in the previous rallies.