Euro Bounded In Tight Range Ahead Of EU Summit, Breakout Soon?

Markets continue to stay in tight range, awaiting a fresh round of inspiration from the EU summit even though the hope for something concrete is dim. There was talk that China is going to introduce additional stimulus and another reserve requirement ratio cut in July. However, judging from the reactions in China stocks, which dropped for the seventh consecutive day, and Hong Kong stocks, which struggled to gather momentum for a rebound, markets are not buying into the idea. In the forex market, the euro continues to struggle in tight range against the dollar and yen at the time of writing but will likely have a breakout either today or tomorrow, before markets close this week.

German Chancellor Merkel repeated once again her opposition to eurobonds ahead of the two day EU summit in Brussels which starts today. Merkel criticized that the idea was economically "wrong and counterproductive." She expressed her concern that the summit would be "too much talk about mutual liability and far too little about improved oversight and structural measures." And she emphasized that "oversight and liability" must go "hand in hand" and "there can only be joint liability when adequate oversight is ensured."

EU President Van Rompuy, who published a plan on banking union earlier this week, will present and discuss the plan during the summit. While Merkel welcomed the proposal, she "decisively reject the presumption in this report that the principle of collectivization takes priority." On the other hand, Spain Prime Minister Rajoy countered and said that the "most important thing today is being able to finance ourselves in the markets" and "Spain, Italy and other countries are going to push for reasonable decisions to be made." French President Hollande and Italian Prime Minister Monti are expected to join forces with Rajoy in the push for eurobonds.

ECB Executive Board member Asmussen said that the work on Spain's banking bailout will start today in Madrid. A memorandum of understanding regarding the banking sector bailout of as high as EUR 100b would be drafted for eurozone finance minister meeting on July. Asmussen said that the July 9 deadline is "ambitious" but "do-able." The roika will start work on the bailout of Cyprus as soon as next Monday. However, there is no clear time frame for the Troika to go back to Greece yet.

In the US, Fed officials continued to voice diverging opinion about additional easing. Atlanta Fed Lockhart said the he didn't think "the conditions have developed that require us to bring out bigger guns quite yet." He'd prefer to be "a bit patient" to look at incoming data. Asked what consolidations would warrant additional stimulus, Lockhart said "dramatically" slower growth and a threat of deflation would prompt him to consideration. He said the Operation Twist extension announced earlier this month is the "maintenance of a policy that was in place that keeps pressure on longer term rates."

On the other hand, Chicago Fed Evans continued to be dovish and urged Fed to do "more accommodation than what was adopted under the Twist." Evans said the labor market situation has been "completely unsatisfactory." And he warned that given the downside risks they're facing, "if there were any substantial downside shocks that we’re hit with over the next six to 12 months, the economy’s not in the best place." He'd support more asset purchases, MBS, to provide additional accommodation.

On the data front, Japan retail sales rose more than expected by 3.6% YoY in May. New Zealand NBNZ business confidence dropped to 12.6 in June. German unemployment, eurozone confidence indicators and UK GDP final will be released in European session. From US, Q1 GDP final and jobless claims will be featured. Initial claim is expected to stay elevated at 385k.