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European Session – Euro weakens as EU Summit looms, dollar surges on US GDP data

Headlines pointing to the remaining differences between Greece and its international creditors caused volatility in the euro today. It was reported that Greek Prime Minister Alexis Tsipras said that some of his government’s proposed reforms that were submitted this week were rejected due to disagreements on tax and pension reforms.

Tsipras’ comments rattled the markets because most investors were optimistic until now that there would be a deal this week. But the news of the rejection came as a shock to the markets and caused the euro to dip. After rising to an early high of 1.1233 against the dollar, gains were erased and the euro was knocked back down below the key 1.1200 level to touch as low as 1.1169. Focus now shifts to the two-day emergency summit of EU leaders, which begins on Thursday afternoon.

Meanwhile, economic data out of the Eurozone today did not help sentiment in the euro. The closely watched German Ifo business confidence index fell for a second consecutive month in June. This highlights the fact that the Greek issue was weighing on the business climate in Europe’s largest economy. The Ifo index slipped to 107.4 in June from 108.5 in May, missing forecasts for a reading of 108.1.

Sterling rallied sharply early in the European session from 1.5749 to a high of 1.5801 on speculation the Bank of England could raise interest rates this year. This came after comments by the Bank’s MPC member Martin Weale whose FT interview hinted to the possibility of a rate hike in August. The pound however soon eroded its gains versus the dollar and fell to 1.5711 due to general risk-off sentiment in the currency markets on Greece concerns.

The dollar rose against the yen to a high of 124.33, helped by US GDP data. The final revision to first quarter growth figures showed a smaller contraction than the second revision and was in line with economists’ expectations. GDP from January-March fell at a minus 0.2% annual rate compared to the minus 0.7% previously reported. The better the US economic data, the higher the expectations that the Federal Reserve will raise interest rates later this year. Meanwhile, the dollar was given a boost on Tuesday after FOMC member Jerome Powell said he was prepared to raise interest rates twice this year.

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