German CPI (YoY)  (JUN F) (06:00 GMT; 02:00 ET)
Expected:                   1.8%                   
Previous:                     1.8%                   

Euro-zone CPI (YoY)  (JUN) (09:00 GMT; 05:00 ET)
Expected:                   1.9%
Previous:                    1.9%

How Will The Markets React?

European asset markets have been consolidating at critical levels after the European Central Bank maintained that interest rates remain accommodative after their July monetary policy meeting, signaling the potential for another round of policy tightening this year. Meanwhile, an unexpected revision to first quarter GDP to 3.1 percent from a year earlier, on boosted future rate hike prospects, as the improvement was led by business investment and surprisingly, export growth. In fact, exports were revised up to 0.8 percent from 0.3 percent, signaling that the appreciation of the euro did little to quell demand for European products. However, markets will first need to see a pick up in price pressures before ramping up their bets on a hike to 4.25 percent, as CPI is still below the bank’s 2.0 percent ceiling.  It just so happens that CPI for the month of June will be released on Monday, and estimates are for a slowdown to 0.1 percent growth on a monthly basis while the annual rate of growth is expected to hold at 1.9 percent. The key to trading the event, though, is by checking out the German CPI release at 6:00 GMT. As the Euro-zone’s largest economy, any surprise jumps or declines in the German figure may signal a shift in the figure for the 13-nation region. As was previously announced, German CPI is expected to have slipped to an annual rate of 1.8 percent from 1.9 percent in May, opening up the potential for an easing in Euro-zone CPI from 1.9 percent, which would only lead markets to discount the possibility of an ECB hike in the near-term.

Bonds –10-Year German Bund Futures

Dip buying over the past two weeks has led 10-year German bund futures on a bumpy ride, with Friday’s session leading prices slightly higher. On Monday, event risk out of the Euro-zone could send bunds spiraling lower or higher, as inflation data will be released. If we see CPI hit the tape at a softer-than-expected figure, bunds could carry on higher as fixed income markets dismiss the potential of an ECB hike in the near-term. On the other hand, a move back to the central bank’s 2.0 percent ceiling may send bunds below support at 110.00, as the data would leave ECB President Jean-Claude Trichet more hawkish.

FX – EUR/USD

As traders desperately search for a top in EUR/USD, the release of inflation data from the Euro-zone could create the perfect opportunity for the pair to collapse. Estimates are for a slowdown to 0.1 percent growth on a monthly basis while the annual rate of growth is expected to hold at 1.9 percent. With EURUSD at such elevated levels and showing hesitance to stay above 1.3800, only the most bullish data out of the Euro-zone will be able to give way to a rally. Moreover, with the ZEW survey on Tuesday estimated to fall back to 19.7 from 20.3, it appears that declines towards 1.3600 may be in store for the euro this week. On the other hand, FXCM SSI has shown that traders are aggressively selling the currency in an attempt to call a top, which may signal buying opportunities for the currency. For more on that report, see the most recent SSI report by Antonio Sousa, Currency Analyst.

Equities – Xetra DAX 100 Index

German stocks rose for a second day, sending the benchmark DAX Index to close up 0.5 percent at 8092.77 after climbing to a record high of 8151.57 earlier. BASF AG led the advance, with shares up 1.9 percent to 98.93 euros after UBS AG raised its price estimate to 105 euros from 92 euros. Meanwhile, Bayerische Motoren Werke AG advanced 0.5 percent to 48.89 euros after the Brussels based European Automobile Manufacturers Association group reported the first increase in European car sales in five months.

The German DAX index has maintained a steady uptrend, and price has recently tipped back above 8,000. However, with the recent highs hovering just above 8,130, do German equities have enough strength behind them to push the benchmark index above the resistance level? With inflation data out of Germany and the Euro-zone due to be released on Monday, equities could make the push higher if CPI proves to soften or hold steady in June, as traders will not be inclined to expect policy tightening by the ECB in the near term. On the other hand, a surprise jump would prove to be disastrous for DAX gains, as the central bank’s hawkish stance would only become more extreme, especially as ECB President Jean-Claude Trichet recently said that monetary policy remains “accommodative.”

Terri Belkas is a Currency Analyst for FXCM.