Talking Points

• All Eyes on Merkel/Sarkozy Meeting as Traders Build Outlook for EU Summit
• Euro Zone, UK PMI Figures Unlikely to Have Lasting Impact on Price Action
• US Dollar Vulnerable as S&P 500 Futures Rise, Optimism May Prove Fleeting

Currency markets were little changed in overnight trade, with the majors locked in narrow ranges against theUS Dollar. All eyes are looking ahead to theEU leaders’ summit beginning on Thursday as the markets wait to see if policymakers are finally able to concretely address theEurozone debt crisis. While outright optimism will be hard to come by considering the long history of failed “comprehensive solutions” already in the history books – the latest one unveiled as recently as late October – investors seem unwilling to commit to a directional bias until the sit-down’s final outcome crosses the wires. For now, this appears to be producing an uneasy stalemate, with markets carefully monitoring the headlines for any clues on how the summit may play out.

Over the coming day, this puts the spotlight on a preliminary meeting betweenGerman Chancellor Angela Merkel and French President Nicolas Sarkozy, where the leaders of the EU’s top-two economies will try to hammer out a joint position ahead of the summit. A press conference after the meeting has not been confirmed as yet, but some headlines are almost certain to emerge, in the worst case familiarly attributed to anonymous “people familiar with the conversation”. Most critically, traders will be looking for a reading on the progress toward a compromise arrangement floated toward the end of last week that envisions establishing the roadmap to deeper integration and a firm commitment to follow it (a German imperative) followed by a larger-scale ECB bond purchase program to relieve immediate upward pressure on borrowing costs (a French objective).

On the economic data front, the docket is relatively quiet. The final revision of November’sEuro Zone PMI composite reading is expected to confirm the manufacturing and services sectors shrank for the third consecutive month. Meanwhile,UK Services PMI is forecast to reveal the slowest pace of non-manufacturing growth in 11 months. On balance, economic slowdown in Europe is hardly news and absent major deviations from expected outcomes, the data’s impact on price action seems unlikely to prove lasting. Sizing up sentiment trends, S&P 500 stock index futures are pointing to higher, suggesting the greenback may find itself on the defensive amid sagging safe-haven demand, but the outcome of the Merkel/Sarkozy meeting could dramatically alter the landscape in the hours ahead.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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