EUR/USD Struggles At 1.3 Ahead Of ECB

The euro sunk as low as 1.2922 against the dollar overnight on political turmoil in Portugal. While some buying was seen in the late U.S. session, helping the common currency to recover, it's struggling to regain the 1.3 handle. Prime minister Coelho refused to resign after the resignation of two ministers this week, including foreign minister Portas and finance minister Gaspar. The uncertainties sent 10 year Portuguese yields as high as 8.18% yesterday and triggered some selloff in other peripheral bonds too. Combining the political uncertainties and higher yields, markets were concerned with Portugal's ability to regain full market access next year, which could then result in another bailout program. Eurogroup chair Jeroen Dijsselbloem noted that the "situation in Portugal is worrying" and he urged political leaders to "assume their responsibilities" to solve the problems. EC president Barroso said that "the initial reaction of the markets shows the obvious risk that the financial credibility recently built up by Portugal could be jeopardized by the current political instability".

The ECB rate announcement and press conference will be a major focus today. The ECB will probably leave the main refinancing rate unchanged at 0.5%. The central bank turned less dovish at the June meeting, and upgraded the economic forecasts for 2014, suggesting policymakers probably have turned more optimistic over the growth outlook. European government bond yields climbed in tandem after the FOMC meeting. This has somehow led to tightening of financial conditions, but was partly offset by euro's decline against the USD. The central bank would pledge to maintain accommodative measures, seeking to distinguish its monetary stance from the Fed's.

The BoE will hold the first meeting presided by new governor Mark Carney, and announce its rate decision today. It's widely expected that the central bank will keep rates unchanged at 0.5%, and asset purchase target at GBP 375b. A recent batch of solid economic data should have reduced the chance of expansion in the quantitative easing program. The BoE usually releases a very brief statement in such circumstances. However, we'll wait to see if Carney will change the communication strategy, which could include forward guidance.

The U.S. market is on holiday today. Any volatilities triggered by the central bank meetings today might be short lived, as focus will remain on tomorrow's U.S. NFP. The 188k ADP figure released yesterday eased some concern of a disappointing NFP number. The employment component of ISM services posted strong gain to 54.7 in June, even though the headline composite index dropped to 52.2. However, it should be noted again that the ISM manufacturing employment dropped into contraction region of 48.7 the same month. So, while a solid NFP number is likely, it's not without risk.

On the data front, Australia building approvals dropped more than expected by -1.1% mom in May. The eurozone is scheduled release the Q1 GDP final.