The lack of U.S. economic data has meant a quieter morning in the foreign exchange market. Most of the major currencies, the euro included are trading unchanged or lower against the U.S. dollar. As Eurozone finance ministers continue to meet and the leaders of Germany, France, Italy and Spain get ready for their four-way summit in Rome, currencies will most likely tread water until the press conference around 14 GMT. Although no major decisions are expected at this meeting, investors are extremely sensitive to any references relating to a stronger economic union. Signs of progress will be positive for the euro while more disagreements will hurt the currency.

Canadian consumer prices is the only piece of North American data on the calendar today and according to the latest numbers, inflationary pressures eased materially in the month of May with consumer prices dropping 0.2 percent. Core price growth, which excludes more volatile items was flat last month. For the Bank of Canada, it will be difficult to continue to justify a hawkish monetary policy stance when prices are easing and consumer spending is declining. This is the second month of weaker data for Canada, which we believe will force the central bank to return to a neutral policy stance when they meet again. Given global and domestic economic conditions, there is no way they can justify a rate hike this year.

Meanwhile going back to Europe, the biggest story of the day, it was no surprise to see a decline German business confidence. With manufacturing and service sector activity slowing, industrial production and factory orders declining, there are plenty of reasons why German businesses grew less confident in the month of June. In fact, the IFO report shows confidence slipping to its lowest level in 2 years. As long as Spain’s banking problems and high yields keep the world nervous, German businesses will remain on edge. The latest round of softer economic data from the Eurozone’s largest economy adds pressure on the ECB to ease. However their decision to do so next month will hinge on the market’s reaction to the outcome of the EU Leaders Summit at the end of the month. If investors are disappointed, the ECB may have to sweep in like a white knight but if EU Leaders finally deliver, they could hold for a few more months.

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