• Summit – positively nothing
• Euro falls for a third day v greenback
• $1.20 eyed

As euro zone exporters prepare for the summer break, the Fifty Shades of Grey which they – along with forex traders and seemingly just about everyone else – uploaded to their e-readers might not just provide them with a nice bit of juicy reading, but a reflection of grey clouds on the horizon as regards sales forecasts that may have to be tweaked lower.  Today, however, it’s the nay-sayers who come in fifty shades – with absolutely no one expecting anything from the upcoming summit of EU leaders.

“Perhaps some euro zone exporters might think that the pre-summit sell off in the single currency offers a chance to lock in some eurusd, euryen, eurgbp and eurcnh,” says Neal Kimberley, forex analyst with Thomson Reuters. “After all, if so many punters are expecting nothing positive for the euro from the EU shindig, even the smallest positive might force a buy back,” adds Kimberley, who concludes: “A little, and I emphasise little, hedging ahead of the summit might make sense from a corporate perspective.”

Thus, we have seen the euro fall for a third day against the dollar today, with further losses looking likely as we head toward the summit. With the distinct lack of expectation that tomorrow’s gathering in Brussels will deliver any new measures to ease the currency bloc’s debt crisis, the greenback firmed as chancellor Merkel prepared to meet president Hollande this afternoon in Paris to thrash out their profound differences. No move toward the issuance of common euro zone bonds appeared likely after German Chancellor Angela Merkel was quoted as saying Europe would not share total debt liability "as long as I live."

German leaders have deflated expectations of any breakthrough from the two-day summit which starts tomorrow, but investors are reluctant to sell the euro aggressively in case any progress in tackling the debt crisis is made. Another factor checking the euro's losses is speculators already having large bearish bets against the common currency.

"Merkel continues to paint the newswires with her thoughts on the EU way forward as the Eurobond concept does not appeal to her still, and the EU blueprint seems a little off in her eyes," said Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut. "I don't think we will get anything substantive out of the EU summit and neither does the market after having been told as much over the past several days by EU officials."

Some traders said a roadmap toward a common banking union or a decision at the summit to activate the euro zone's rescue fund to start buying Italian and Spanish government debt and lower their borrowing costs could provide relief to the euro. But growing concerns that more peripheral euro zone nations will be shut out from capital markets, and expectations that fiscal austerity will drag the region into a more painful recession, will more than likely ensure the single currency stays under pressure.

As to how one might trade these choppy waters, any bounce toward the $1.27 or $1.28 level on forex charts would attract sellers.

"I am going short euro/dollar into the summit," said Stuart Frost, head of absolute returns and currency at RWC Capital, a London-based fund manager. "The euro should be a lot lower than what it is, and even if there is an agreement, chances of which are very low, the currency is headed towards $1.20."

So, whether or not banking union is on its way, we’ll have to wait and see. At the time of writing, Europe's leaders ahead of their summit look like confining themselves to concentrating on short term measures in order to boost the euro zone economy. Olli Rehn, EU commissioner for economic affairs, has just reporting as having said: “It is essential that policy measures of short-term are decided by the European Council [...] We continue to work to facilitate decisions on such measures for short-term market stabilisation.”

So, with Fifty Shades Of Grey now the first book to sell more than one million copies on the Kindle, the next in the trilogy being Fifty Shades of Nay will hopefully be eclipsed by Fifty Shades of Yay as the markets see out the year on a high!

Drew Hillier. Editor, ForexSpace.com