On the economic side, only the US PPI and Michigan consumer sentiment warrant some attention. The events are limited to a speech of Atlanta Fed Lockhart, after the European closure. Lockhart is an interesting speaker and currently FOMC speaker. He is a moderate who votes currently with the majority at the FOMC meetings. He recently was open to more easing, but not yet convinced. Have recent reports convinced him one or another way on future policy.

June PPI (Friday) will, just like import prices, be affected by lower energy prices. Therefore, headline PPI will show a sharp decline (consensus -0.4% M/M and 0.2% Y/Y). However, core PPI may show a more trend-like 0.2% M/M increase, which would bring the Y/Y rate to 2.6% from 2.7% Y/Y previously. The steep downward surprise of the import prices means that the risks for headline and core PPI are also clearly on the downside of expectations. However, the relationship between import prices and PPI are well known, meaning that markets shouldn’t be surprised by such an outcome. Of course, in the FOMC framework, it remains an element that brings QE a bit closer.

Michigan consumer sentiment is expected to have broadly stabilized in early July (at a weak 73.5). Lower gasoline price might have been a positive, but the general weakness of the labor market and slow income gains should prevent any big improvement in confidence.

Today, the Italian debt agency issues a new 3-yr BTP (€2.5-3.5B % Jul2015). It also taps the off the run 10-yr BTP (4.25% Sep2019), the on the run 10-yr BTP (5.50% Mar2022) and the off the run 15-yr BTP (4.75% Aug2023) for a combined €1-1.75B. Yesterday’s downgrade might make thinks complicated but we think the Italian treasury will have drummed up enough local demand to digest the, mostly short term, and in general, relatively low, amount of debt.

The US 30-year bond auction (re-opening of 3% 2042) went well. The auction stopped firmly through the WI bid (2.58% versus 2.589%) Demand was strong, but not like yesterday’s stellar 10-year Note auction, as the bid/cover amounted to 2.70 (average 2.65). Indirect bidders took down 36.8% of the auction and Direct bidders 20.1%. While the auction went well, there was no reaction afterwards in the market. Remember that the exceptional strong 10-year Note auction caused a spike higher that was immediately seized to sell and book profits.

The euro changed hands in the 1.2265 range at the start of trading in Europe. During the morning session the news flow was mixed. There were few economic data, but as is mostly the case, the focus was political headlines. German Fin Min Schaeuble indicated that it could take until the autumn for the Constitutional court to give its judgment on the bailout fund and the fiscal compact. On the other hand, Spain announced a new set of budget measures to reduce the public deficit by €65 bln by 2014. Spanish bonds and the Spanish equity market outperformed yesterday.

However, the impact on the single currency was limited. The pair moved away from the 1.2234 low reached on Friday and tried to for a test of the 1.23 area to times, but a real test didn’t occur, indicating that there was no big appetite to reduce euro short positions. So EUR/USD returned to the mid 1.22 area early in US trading as global/European equity markets had to give up (most of) the early gains. The US trade deficit narrowed more than expected but the report had no lasting impact on EUR/USD trading. EURL/USD reached another minor now low late in the European trading session. However, the dollar lost some ground going into the publication of the Minutes of the previous Fed meeting. The Fed kept the door open for more policy stimulation if needed.

Markets had apparently hoped that the commitment of the Fed would have been a bit more concrete. In a first move, equity investors were disappointed and the dollar jumped higher, pushing EUR/USD to a new correction low of 1.2213. Later in US trading, equities did find their composure and the rise of the dollar halted. EUR/USD closed the session 1.2239, little changed from the 1.2250 close on Tuesday evening.
 

 
Overnight, the news flow from Asia is mixed. The central bank of Korea unexpectedly cut its interest rate by 25 basis points while the labor market data in Australia showed an unexpected decline in employment. The action of the Korean central bank can be considered as growth supportive. However, investors are focused on the deterioration in the prospects for global growth. Asian equities are mostly in the red (China is the exception to the rule). So, sentiment on risk remains fragile. EUR/USD is changing hands near yesterday’s closing levels. So, the pair is still within striking distance of yesterday’s post Minutes low.

Later today there are again few eco data in Europe to inspire trading. The EMU industrial production data from May are interesting but outdated. The report is usually not important for trading. In the US, markets look out for the import prices and the jobless claims. There are some technical issues at play for the claims. So, a (positive?) surprise is possible. However, we doubt that one better than expected claims report will be able to remove investor’s distrust on the global economy. So, (EUR/USD) trading might develop in context that is quite similar to the previous days. At this stage there is no indication for a trend reversal in the EUR/USD downtrend yet. That said, we have the impression that the momentum of the decline is slowing. In addition, on days like today with few eco data on the calendar, trading might developed in holiday-thinned market conditions. We don’t see any reason to fight the EUR/USD downtrend, but short-term investors can consider partial profit taking/stop-loss protection on EUR/USD shorts.

Gold holdings  of SPDR gold trust, the largest ETF backed by the precious metal, increased to 1,281.62 tons, as on June 18. Silver holdings of iShares silver trust, the largest ETF backed by the metal, increased to 9,875.75 tons, as on June 22.

Most of the commodities remained under pressure, as investors sentiments weighed ahead of the upcoming European Union summit meeting later in the week with little or no hopes of any resolution to the euro-zone debt problems.

A fifth euro-zone country turned to Brussels for emergency funding when Cyprus announced it was seeking a lifeline for its banks and its budget, hours after Spain submitted a formal request to bail out its banks.

Greece made public its demands on the EU, which included an additional 20billion euro. The newly appointed Greek Finance Minister has resigned after one week in office. The Greek Prime Minister is hospitalized and will not attend the EU Summit.

The dollar index, which compares the US unit to a basket of other currencies, was trading at 82.540 on Monday, up from 82.267.

The euro remains weak but stable ahead of the EU Summit, which investors have determined will yield little results. The euro is trading at 1.2515

Copper prices recovered, as investors shifted their attention from the European debt situation and focused on an improved demand outlook in the US after data showed new home sales surged in May to a two-year high.

Zinc market was in surplus by 161,000 tons during Jan-Mar’12 period against a surplus of 540,000 tons recorded in the whole of the previous year, as per WBMS.

South Korea has bought 500 tons of zinc via a tender from Korea Zinc Inc at $159 per ton over LME prices on a cost, insurance and freight (CIF) basis, as per the state-run Public Procurement Service.

Crude oil futures pared some of the losses in late trading session, but still closed lower, on demand concerns and a strong dollar that continued to gain against major currencies.

EU governments formally approved an embargo on Iranian oil to start on July 1, dismissing calls by debt-ridden Greece for possible exemptions to help ease its economic crisis.

South Korea became the first Asian consumer of Iranian crude to announce a halt in imports, after the government said they would be suspended from July  1,  due  to  a  European  Union  ban  on insuring tankers carrying Iranian crude.

Natural gas futures rose to their highest level in a month, after a tropical storm knocked out more than one-third of natural-gas production in the Gulf of Mexico.

New flow today will be centered on the EU meetings and Spain’s official request for financial assistance. Otherwise the eco calendar is light and not much is expected to happen until mid week when events begin to rapid fire, as the month draws to a close.

Downgrades of Morgan, Credit Suisse Group AG and 13 other global banks, announced by Moody’s Investors Service after months of speculation about dire fallout, were met instead by rallies in stocks and bonds. The cost to protect Morgan Stanley’s debt against losses dropped, and the shares rallied as much as 4.6% in extended trading yesterday after the ratings firm cut the bank by two levels rather than a threatened three grades.

American markets rode back after Citigroup Inc. the lender whose credit rating was cut by Moody’s Investors Service to the lowest since its 1998 creation, led Wall Street banks in dismissing downgrades and urged investors to seek alternative analyses. Moody’s two-grade cut of ContiGroup’s ratings was unwarranted, arbitrary and failed to recognize the lender’s financial strength, the New York-based bank said in a statement.

European stocks fell on Friday as German business confidence declined to its lowest level in more than two years. European finance ministers battled over the strategy to contain the debt crisis, with creditor countries resisting leniency for Greece and playing down market concerns about the bailout of Spanish banks.

Spain’s banks would need as much as €78 bn in capital to withstand worst case economic scenario, according to two consulting firms hired by the government.

Taiwan’s jobless rate climbed for the second straight month in May as a growth slowdown in China and the European debt crisis hurt the export-dependent economy.

Japanese stocks fell snapped a two-day rally as US housing and jobs data missed estimates, stoking concern the global economy is slowing. Shares pared losses as the Yen’s drop to a five-week low against the dollar lifted exporters? outlook.

Gold up by 0.19%  in New York as some investors  bought purchases after prices rose the most since Sept.. More monetary stimulus from around the world including China, the European Central Bank and the Fed will not be crucial to keep investors positive to gold. Silver also up by 0.35%.

Oil rose by 0.25% to the highest price in almost one week on signs of an economic resilience (expected) in the US, however, supply also remained low. London-traded Brent crude rose from the lowest close in more than two weeks. Oil turned back down below the 80.00 price level in Asian trading Monday.

Copper declined by 0.21% to the lowest in more than five months in New York after data from the US and China fueled concern that demand was slowing in the two largest users.

The June FOMC statement recognized the slowing of the economy in various sectors, like the household spending and the labor market. Business fixed investment was seen as continuing to advance (unchanged and also housing sector was described as depressed despite some signs of improvement (unchanged). Household spending appears to be rising at a somewhat slower pace than earlier in the year, while in April it was characterized as continued to expand. On the labor market, the statement says that “growth in employment has been slower in recent months, whereas labor market conditions were seen as improved and the unemployment rate declined in April.

Concerning the economic outlook, there was a small adjustment. Growth is still expected to remain moderate over the coming quarters, and then to pick up very gradually (addition of very). Unemployment rate is now anticipated to decline only slowly, while in April is expected to do so gradually. Financial strains are as before seen as posing a significant downside risk. The economic projections were however rather substantial revised lower for both 2013 and 2014, meaning that growth is expected to be at or slowly below trend growth for two more years. Consequently, governors upgraded their projections for unemployment rate, showing about a stable unemployment rate by year end and only a slightly lower one by the end of 2014 The Fed funds rate is kept unchanged (0-0.25%) and so is its forward looking rate guidance. The FOMC still expects that conditions will warrant exceptionally low FF levels at least through late 2014. The revisions outlook for growth and unemployment explain why the FOMC eased policy. The choice of an operation twist suggests the Fed didn’t choose for a shock and awe action.

Investors expected a QE-3 program, which would have been a more forceful action. The explicit reference in the statement that the Fed is ready to take further action means that the decision on the tool it used was finely balanced. Mr. Bernanke also already at the start of the press conference confirmed that the Fed would not wait long to do more if in particularly the labor market conditions would not improve. He mentioned that such action could mean more QE-3 (by end of year no short-dated securities are left in the Fed’s portfolio making another operation twist unlikely), but as the operation twist is decided to last 6 months, such QE-3 is not yet baked in the cake. Other easing options are possible. There are two more months of eco data before the August meeting and thus don’t exclude that already in August the Fed might go for more accommodation, and don’t exclude, despite what was written two lines higher, it might be in the form of QE-3. Bernanke also hinted why they didn’t take bolder action at this meeting: the data are still not very clear (weather and other seasonal adjustment issues may have distorted them) and non-standard tools carry also risks and costs.

Therefore, the Fed wants to be convicted they are needed; maybe the Fed wanted to keep some ammunition for if the EMU crisis would escalate. He firmly added though that the Fed would take bolder action, if needed.

The operation twist decided last year will end by the end of June. The FOMC decided though to continue through the end of the year its program to extend the average maturity of its holdings of securities. The NY Fed will conduct the operations. It will purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and sell or redeem Treasury securities with remaining maturities of approximately 3-years or less. The Fed states that this should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The NY Fed added that by the end of the program, the Fed will hold almost no securities maturing through January 2016. Securities maturing in H2 of 2012 will be redeemed and not sold as the effect on the portfolio is nearly similar. The distribution of the purchases is approximately the same as in the first program (30% in 20-30 year bucket, 32% in each the 6-8 and 8-10 year bucket, 4% in the 10-20 year and 3% 6-30 year TIPS. By the end of the program, purchases and sales will each amount to $267B.

However, the success of this party clearly demonstrates the anger in the country and the tiredness of austerity policy that don’t seem to improve the situation.  Basic addition and party programs show that a ND-PASOK coalition (eventually supplemented by other smaller parties) is the only viable option for ND to form a coalition. PASOK might want to include its rival of the Left (Syriza) into government, but this looks unlikely. The ND leader Samares has now three days to form a coalition and if he wouldn’t succeed, the Greek president will ask Syriza to try to form a government.

However, most likely a ND-PASOK government is likely, even if PASOK suggests that it might support a ND minority government from parliament. Next, the government will open negotiations with the Troika to get some changes to the program. There seems to be some limited room of maneuver. The German Minister of Foreign Affairs said the Troika might consider giving Greece more time to rein in its finances, but repeated that treaties must be valid in substance, leaving no room to cancel or renegotiate the bail-out agreement. The chaotic situation in Greece of late means that the country is without doubt  off program. This means normally that Greece should take new measures to remedy. It is here we expect the Troika will give Greece some more time. The funding of the government and of the banks remains the key aspect, but we suspect that during the negotiations, the Troika will take care of these funding issues.

Negotiations between Troika and the new government may take indeed some weeks. Some growth initiatives towards Greece might also be a sweetener to keep Greece inside the euro area. First big bond redemption of €3.1B is scheduled for August 20, at which time a eventually temporary solution has to be found.  For Greece, the situation remains very difficult. It is hard to see how the country may satisfy the bailout targets (even when giving some extra time) and thus the prospect of a delayed exit won’t fade rapidly. We suspect that the idea of some market participants that by giving Greece more time, the EMU is just giving itself more time to prepare for a Greek exit won’t die. Also for Spain and Italy, the Greek election results are no game changer.

Globally, Fitch has downgraded Spain by three notches and has warned the US of a similar treatment. In short, it is time to step back after the advance we saw earlier this week.

Gold futures fell sharply, after Federal Reserve Chairman Ben Bernanke refrained from outlining steps that the central bank may take to bolster the economy while risk from Europe’s debt crisis continues to linger. Gold holdings  of SPDR gold trust, the largest ETF backed by the precious metal, increased to 1,274.79 tons, as on June 6. Silver holdings of iShares silver trust, the largest ETF backed by the metal, declined to 9,669.08 tons, as on June 7.

Federal Reserve Chairman Ben Bernanke disappointed markets, by offering few clues that further monetary easing was imminent, but said the central bank was ready to shield the economy if financial troubles mount. China announced a surprise interest rate cut by 25bps to combat faltering growth, underlining concern among policymakers worldwide that the euro zone’s deepening crisis is threatening the health of the global economy.

Spain’s credit rating was cut by three notches amid expectations it may soon seek EU help for banks beset by bad debts.

The dollar index, which measures the US unit against a basket of six major, was trading at 82.262 on Thursday, down from 82.264.

Copper prices climbed in heavy volumes after a surprise rate cut by China stirred bullish demand prospects, but gains were soon pared after US Federal Reserve Chairman dashed hopes for further stimulus measures. Copper futures for July delivery closed slightly down at $3.3705 per pound on the COMEX of the New York Mercantile Exchange.

Crude oil futures declined sharply, erasing early strong gains after Federal Reserve Chairman stopped short of signaling imminent new Fed action to stimulate the economy.

India’s crude oil imports from Iran declined by about 38% in May from a year ago & a second month of steep cuts as they switch suppliers to cushion the impact of new US sanctions on Tehran over its disputed nuclear program.

Natural gas fell more than 6% & the most in 4-months, after a government report showed that US inventories rose more than forecasted. The US Energy Department said that gas supplies in the week ended June 1 rose 62bn. cubic feet to 2.877 trillion.

The US labor market stumbled in May as employers added the fewest workers in a year and the unemployment rate rose, dealing a blow to President Barack Obama’s re-election bid and raising the odds the Federal Reserve will take steps to boost growth. Payrolls climbed by 69,000 last month, less than the most- pessimistic market forecast after a revised 77,000 gain in April that was smaller than initially estimated, leading to a sharp fall in the US markets.

Greece had its highest possible credit rating lowered by Moody’s Investors Service, which said there’s an increasing risk the country may exit the euro region. Greece’s country ceiling, the highest rating that can be assigned to a domestic debt issuer, was cut to Caa2.

Spanish and Italian government bonds rallied, paring a slump for the week, on speculation the ECB will buy the securities to help prevent the currency bloc from disintegrating. The European Union is targeting July 9 as the start date for its permanent euro-area rescue fund, the `500 bn (USD620 bn) European Stability Mechanism.

Asian stocks fell for a fifth week, the regional index’s longest streak of weekly losses in a year, as Spain’s borrowing costs soared and amid further  signs that China’s economic slowdown is deepening, dimming the outlook for companies dependent on global demand.

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Gold up by 0.19% and the dollar  sliced, as on speculation that the Fed will be reluctant to buy more debt to shore up growth, easing concern that inflation will accelerate. Silver up by 0.25% as STFs in New York and London bought precious metals to book profits.

Oil down by 0.80% for the first time in three days as oil demand rose in the United States and the Federal Reserve said its holding off on increasing monetary accommodation due to slow and improving economy. However, supplies remain affected.

Copper gained 0.97% to the highest level in a week as the Chinese government seeks to spur its economy, and Germany pledged to consider growth measures for Europe, improving the outlook for metals.

The euro was under slight pressure at the start of trading in Europe as investors were disappointed on the lack of results of the informal EU Summit on Wednesday evening. Early in Europe, the news flow turned further negative as the PMI’s in the euro zone and the German IFO indicated a sharp setback in economic activity.

EUR/GBP reached an intraday low at 0.8000, but a break of the recent lows just below the big figure didn’t occur. Mid-morning, the details of Q1 UK GDP brought also an unpleasant surprise. Growth was downwardly revised from -0.2% Q/Q to -0.3%Q/Q and the details were also not inspiring at all. This Q1 GDP report raised speculation that the BoE might restart its programme of asset purchases very soon. However, the impact of EUR/GBP trading was again limited. EUR/GBP returned to the 0.8025/30 area early in US trading.

However, the EUR/GBP cross rate didn’t regain any important resistance. Later in the session, EUR/GBP joined the broader decline of the EUR/USD headline pair. EUR/GBP closed the session near the recent lows at 0.7999 (compared to 0.8019 on Wednesday).

Today, calendar in the UK is empty. So, EUR/GBP trading will be driven by the overall performance of the single currency. We assume that it will be difficult for EUR/GBP to sustain above the 0.8000 mark.

From an analytic point of view, the EUR/GBP cross rate is showing tentative signs that the decline is slowing. Two weeks ago, the key 0.8068 support was cleared. This break opened the way for return action to the 0.77 area (October 2008 lows).

Last week, the pair set a correction low at 0.7950. From there, a rebound kicked in/short squeeze kicked in. The pair broke temporary above the MTMA, but the gains could not be sustained. Sustained trading above the 0.8095 area (gap) would call off the downside alert. A first attempt to do so was earlier this week. A further setback in the 0.7950/0.8100 trading range is favoured.

There was some volatility after the publication of the UK inflation data. Inflation declined to 3.0% Y/Y from 3.5%. This was marginally below the market consensus, suggesting that inflation might become less of an issue for the BoE. EUR/GBP hit intra-day highs in the 0.81 area, but in fact EUR/USD more or less joined the decline in cable, leaving the EUR/GBP cross rate little changed.

The IMF published its outlook for Britain and advocated further monetary easing if things get worse. At the same time, the government should be less strict on austerity if growth comes under further pressure. In theory, this is no support for the currency, but we didn’t see any lasting market reaction to the IMF headlines.

Later in the session, EUR/GBP joined the broader sell-off decline of the euro overall. The pair closed the session at 0.8050, compared to 0.8094 on Monday evening.

Today, the UK eco calendar is enticing with the retail sales and the CBI industrial trends survey. One week after the Inflation report, the BoE will also publish the Minutes of its latest MPC meeting. After a weather-related boost in March (1.8% M/M) UK retail sales are forecasted to have dropped in April. The consensus is looking for a 0.8% M/M decline, but we believe that even a stronger decline is not excluded.

The CBI industrial trends survey is forecast to show a slight decline in total orders (from -8 to -11). Most important will be the BoE Minutes, although the Inflation Report provided us already with some insights.

The UK inflation report was soft on growth and didn’t exclude the option of more policy stimulation, which was somewhat surprising after last month’s Minutes, which showed that Posen dropped his case for more QE and the BoE sounded a bit more concerned about inflation.

Still, the Minutes of the May 9 and 10 meeting will be interesting as the Bank of England decided to pause and not increase the size of its asset purchases. We believe that David Miles most likely continued to vote for more QE and there is a risk that Spencer Dale joined his call for more asset purchases. After the Inflation Report, it will be interesting whether the BoE will sound somewhat softer on growth too. In theory, a soft BoE should be negative for sterling.

However, yesterday’s price action suggests that the overall sentiment on the euro remains the key factor also for EUR/GBP trading. The picture of the EUR/GBP cross rate is less negative compared to the EUR/USD headline pair. However, yesterday’s price action suggests that the upside in EUR/GBP will be difficult, too.

Formula One’s IPO may be Singapore’s largest since February 2011, according to data compiled by Bloomberg, helping it challenge Hong Kong in drawing listings by brand-name companies. Italian fashion house Prada SpA picked Hong Kong for its USD2.1 bn IPO in June last year.

The disconnect between the Fed’s optimistic forecast for  expansion and its more bearish expectations for the labour market and inflation have made it difficult to predict the course of monetary  policy, according to Stanley, who said he underestimated central bankers? emphasis on their goal of full employment.

The Fed has left its benchmark federal funds rate near zero since December 2008 and in January extended its plan to keep the rate low from an earlier time frame of mid-2013. Chairman Ben S. Bernanke has also undertaken two rounds of asset purchases totalling USD2.3 ton and is scheduled to complete a program in June.

European stocks climbed, after the biggest weekly selloff for the Stoxx Europe 600 Index since September, as China’s pledge to boost growth helped offset concern over Greece’s possible exit from the euro area.

Group of Eight leaders on May 19 urged Greece to stay within the Euro area as polls in the country showed a close race between parties supporting and opposing austerity measures linked to the EU-led bailout.

The Nikkei 225 Stock Average rose from a four-month low as a weaker yen lifted the outlook for exporters and on speculation shares were oversold.

Gold up by 0.08% and the dollar  sliced, as on speculation that the Fed will be reluctant to buy more debt to shore up growth, easing concern that inflation will accelerate. Silver fell by 0.33% as STFs in New York and London sold precious metals to book profits.

Oil  up by 0.10% for the first time in two days as oil demand rose in the United States and the Federal Reserve said  its holding off on increasing monetary accommodation due to slow and improving economy. Copper gained 1.1% to the highest level in a week as the Chinese government seeks to spur its economy, and Germany pledged to consider growth measures for Europe, improving the outlook for metals.

Economic activity surrounding cars was the saving grace for Q1 GDP, responsible for contributing +1.1% out of total ex-inventory growth of 1.6% (i.e. absent the uptick in economic activity surrounding motor vehicles, final domestic  demand would have been much lower).

This was not a one-off: motor vehicles added 0.5% to Q4 2011 GDP as well. The question here is whether or not the break-neck pace of automotive activity can continue.

The arguments “pro” are:

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• the US vehicle fleet is aging
• prior to the past two months, the jobs outlook had been improving
• new cars offer many technological advancements such as fuel efficiencies, etc. The argument ‘con’ is essentially that employment data — payrolls, wages, hours worked — have recently softened and are not strong enough to support a major consumption upswing. A non-macro argument would be that improved US cars are winning market share — even if overall industry sales might in the medium run remain flat

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We’re expecting cars to make a solid contribution to durable goods orders along with overall strength signalled by the ISM index. The risk factor here is that new orders at Boeing plummeted to a mere four new planes. That represents an over 90% reduction from the previous month, and could undo all of the momentum from new car orders.

Still, we’re anticipating growth of 0.5% on balance. Among the highlights of next week’s UK economic data calendar will be the release of CPI and RPI inflation for April. We expect CPI inflation to decelerate from 3.5% y/y to 3.3%, while RPI inflation is likely to hold steady at 3.6% y/y. Inflation had been on a fairly steep downward trajectory since September, however, that came to an abrupt end last month when the rate ticked back up. We see a moderate further deceleration into mid-year, but beyond that the downtrend is likely to lose momentum. The main drivers of price gains this month are likely to be alcohol, tobacco and transport prices, while a high base effect in air travel costs will provide a drag on the headline print.

Overall, inflation is proving stickier than expected earlier in the year. Part of this is due to the jump in oil prices towards US$125/bbl until mid-March.

Having said that, the drop to around US$110/bbl this week should take some of the heat out of petrol prices going forward. However, this development is unlikely to change the big picture by much. Our view is that CPI inflation will only very briefly dip just below 3% y/y this year.

The array of pre-programmed price hikes such as university tuition fee hikes, sin taxes, mortgage rate increases, etc. should leave inflation persistently above the Bank of England’s 2% target.

Thailand’s economy remains on a recovery path with private consumption and exports supporting the rebound in the first quarter of the year. Reconstruction efforts and fiscal stimulus remain the key drivers to the Thai recovery after last year’s floods. However, this improvement has been uneven across industrial sectors and while some of them have regained their pre-flood levels, others remain subdued. We anticipate that the Thai economy will grow 5.0% y/y in 2012; however, we expect a close-to-zero growth rate in the first quarter of the year after decreasing by 9.0% y/y in the last three months of 2011.

Produces price came out below the market consensus and the ONS also indicated a deeper slump in construction than reported earlier. This could have a negative impact on Q1 GDP of 0.1%. These data raised questions whether the BoE will be able to stick to its decision not the raise the amount of asset purchases. Whatever, the data provided a good excuse to take some profit on standing EUR/GBP shorts.

EUR/GBP filled offers in the 0.8045/50 area. However, with the euro under pressure overall, there was no strong enough momentum for the pair to regain Thursday’s top in a sustained way. EUR/GBP closed the session at 0.8038, compared to 0.8013 on Thursday.

Today, the calendar in the UK is empty. So, sterling trading will again be driven by global market sentiment and by the headlines from Europe. The euro is again ceding ground this morning and so does the EUR/GBP cross rate. For now, we don’t see any reason to row against the tide as sentiment on the euro will probably remain negative short-term.

That said, we turn a bit more cautious on sterling. After the recent poor UK eco data, markets will look out whether the inflation report might keep the door open for a restart of the programme of asset purchases. This might at least temporary cap the upside of sterling against the euro. Short-term players can consider partial stop-loss protection on EUR/GBP shorts.

Of interest is the emergency meeting called by the EU Finance Ministers, The theme of the meeting will certainly be the situation in Greece and its fate inside EMU. Over the week-end, EU president of the Commission, Barroso, suggested Greece would have to quit the euro if it doesn’t follow the rules of the euro (pacts, bailout programme).

There were other influential sources that put Greece for the choice to abide with the rescue programme or face default and exit. We think Greece will prominently be present at the Eurogroup discussions and while not made public, there should be a plan B on preparation. So, the comments afterwards might be interesting.

Also markets will also keep an eye on the Spanish plan for the banking sector. Will Spain be able to put in place a credible plan to overhaul its banking sector while at the same time not putting at risk the sustainability of Spanish government finances? This is no easy exercise and the report might be vulnerable to all kinds of critics. Last but not least, the formation of a Greek government will also continue to figure in the headlines. The talks are on-going, but at least for now there is no indication that a workable compromise is in the making.

We could see the euro plunge to new lows. Which could be of great benefit to the Sterling.

The euro eased 0.2 percent at $1.3031 while the Australian dollar, another gauge of investor risk appetite, fell 0.3 percent at $1.0175, also off a four-month low of $1.0110 hit on Monday. The AUD has been collapsing since the May 1st rate reduction of 50bp by the RBA followed at the end of the week with the RBA downwards revision of GDP and inflation.

Evidence of deep public outcries against using severe austerity measures to solve Europe’s refinancing problems prompted the International Monetary Fund (IMF) to show some new flexibility on Monday over how quickly it would press deeply troubled countries to bring their budgets under control if economic growth weakens.

The Merkel plan has not and is not working. Most constituents believe the politicians have no connection to the people who are hurt by these deep austerity measures.

The shift in tone could prove important for Greece, where Europe’s sovereign debt crisis began in 2009.

Sunday’s election stripped Greece’s two mainstream parties that backed a painful European Union/IMF bailout of their parliamentary majority, reviving uncertainty over whether Athens will stay in the euro zone.

The chairman of ailing Spanish lender Bankia SA stepped down on Monday, and sources said a government announcement on Bankia could come on Friday once a successor is in place.

While strict fiscal discipline could aggravate the already shrinking euro zone economy, some analysts caution that pursuing growth-oriented policies also won’t help solve the core debt issue.

The fact that neither extreme will, it needs to be a combination, but one that the population can live with; otherwise you will end up with completely lost generations.

Oil was mixed on Tuesday, with U.S. crude futures down 0.1 percent at $97.80 a barrel after tumbling to a low of $95.34 on Monday while Brent crude gained 0.3 percent to $113.44, rebounding from Monday’s lows near $110 per barrel.

This is a positive sign for economic recovery in the US and abroad, as reduced costs energy costs will help many governments stimulate growth and jobs and reduce consumer debt.

Analysts said Chinese data due later this week, including trade balance figures, consumer prices and industrial output was also in focus. Weaker data from the world’s second-largest economy could underscore how vulnerable the global growth outlook is and dent investor risk appetite.

This is the month that things need to happen, the US is in spring stall mode, Europe is falling back into a recession and Asian markets are hurting. This is a make it or break it month, as the economy is sitting on a pinnacle, we need to push it to grow and not contract.