EUR/USD retreated nearly 100 points to $1.2408 after a German government official downplayed the EU summit and a string of poor macroeconomic data depressed sentiment further.
As the two-day EU summit gets underway in Brussels today, expectations are low that we'll see any major resolutions emerge.
Spain and Italy are at risk of getting locked out from the money markets and are keen to bring down the borrowing costs. Spain is also hoping to be able to use EU rescue funds to directly recapitalise the troubled European banks, including its own.
German Chancellor Angela Merkel, however, is holding firm in opposition to both the common eurozone bonds and the use of funds to directly capitalise the banks, saying they are counterproductive and uneconomical. An anonymous German government official further lowered expecatations for strong resolution from the summit saying that any detailed deal will take weeks not days. Following the comments the euro plunged from $1.2507 to $1.2408 in the space of just 20 minutes.
Meanwhile, the number of unemployed in Germany grew more than expected in June, rising 7,000 from a previous flat reading in May. However, the German unemployment rate stood at 6.8%.
Separate reports showed the European Union’s consumer confidence, business climate and industrial confidence all dropping in June, indicating that the businesses and consumers in the region have become more pessimistic about their prospects after the recent worsening of the banking crisis.
A drop in confidence is likely to result in weaker spending patterns and further downward pressure on the region’s GDP.