Quiet, though Nervous Start to Week

The major currencies are little changed from levels seen just before the weekend.  Most of the actively traded emerging market currencies are lower, led by South Africa, with carry over losses after last week's downgrade and Poland, where the zloty has been punished for collusion between the central banker and the Interior Minister on a partisan political issue (replacing the finance minister last year), that raises questions over the central bank's independence.

Aided by hawkish comments from the BOE's Carney last week and echoed by outgoing Deputy Governor Bean, ahead of this week's data (inflation and retail sales) and MPC minutes, sterling was briefly pushed through the $1.70 level (~$1.7011) quickly came back off to set new session lows just above $1.6960. The euro fell to around GBP0.7960 early in the European morning before bouncing to little changed levels.

EONIA finished last week at a record low of 2.6 bp, and there is some risk that it may go negative. This week is also the when the ECB's decision to formally stop sterilizing the SMP purchases, which will also add liquidity this week. The euro tested its recent lows, just above $1.3510. The reactive bounce took it back toward $1.3535. Additional resistance is seen near $1.3550. On the downside, a break of $1.3500 would spur a test on the year's low, just below $1.3480.

In lieu of fresh economic data, geopolitical concerns are unchallenged as the center of attention. Oil prices are slightly firmer, with WTI rising for the fourth session. Brent prices rose by the largest amount in a year last week, and WTI rose a little more than 4% last week. The Iraq's Shiite government is trying to repel the Sunni ISIL and appears to have, thus far, deterred t move south where roughly three-quarters of the oil output is located.

ISIL reportedly has control of the pipeline; though, that goes to the country's largest refinery (310k bpd). A US aircraft carrier is headed for the Persian Gulf. Ironically, Iran is also opposed to the ISIL and could work in concert with the US under some scenarios. The US government does seem sympathetic to the argument that the underlying problem is that the Maliki government is representative.

Meanwhile, the talks between Gazprom and Ukraine have broken down. Gazprom has indicated that it will only provide enough gas to Ukraine's pipeline network to cover the demand from other European countries, but not for Ukraine and that going forward Ukraine would have to pay in advance. A little less than a seventh of EU's gas comes through Ukraine. Natural gas prices are jumping today in response.

Gazprom says that Ukraine owes $4.46 bln for gas that has already been delivered. Negotiating with Ukraine, the EU offered $1 bln now and the rest by year-end. Gazprom demanded $1.95 bln now. Previously, Gazrpom extended the payment date until today after received almost $800 mln for supplies delivered in February and March. Meanwhile, what increasingly looks like a civil war in east Ukraine may see a new push escalate the sanctions.

The US reports the Empire State Manufacturing for June; TIC flows, where China, Russia and Belgium's activity will be closely looked at, and the May industrial production report (which should show a healthy rebounded from the 0.6% decline in April and a 0.4% decline in manufacturing). Last week's consumer service spending was considerably weaker than expected leading to cuts in Q1 GDP estimates, but Q2 GDP still appears to be tracking around 3%.