Tomorrow’s macro highlights:

• EUR - German GDP (Q1 preliminary reading)

Calm before the storm as Euro, Pound look to recover lost ground?

Currency markets finished last week on a relatively subdued note and the economic calendar suggests that theme could well be continued in the short term - although political risks are lurking. The dollar has found itself looking a little exposed as the theme of cooling inflationary pressures plays out across the Atlantic, whilst Mario Draghi’s speech ahead of the weekend break appears to have been well received. He’s supporting French calls for tighter banking union across the Eurozone - something that would provide another layer of value to being in the Euro - but this could quickly be overshadowed by the developments we’re seeing in Italy right now. Over the weekend, Italian politicians for populist parties League and 5Stars have taken a step closer to forming a coalition government. They report back to the Italian President today and the outcome here, with both parties wanting to abandon austerity - and potentially the Euro, too - could create a whole set of fresh headaches for the ECB.

Aside from a handful of speeches from Central Bank members and those anticipated developments out of Italy, there’s really very little in terms of economic data on the table today, which could in turn serve to support both the Euro and Pound against the dollar. However, looking into Tuesday’s session and 7am BST sees the first release of the German Q1 GDP data. This comes a few hours ahead of the pan-Eurozone data, but given the sheer size of the German economy, it’s very much the canary in the coal mine. The market is bracing itself for a notable slowdown but anything much below the 0.4% which is forecast will raise fresh questions over how the ECB can expect to stop its QE program. We may be in for a quiet start to the week, but it seems as if the common currency is likely to find itself very much in the spotlight in the days ahead.

GBP/USD
Cable held above the psychologically important 1.35 level on Friday, but remains vulnerable to renewed selling pressures. However with the pound being seen as oversold and the market now eyeing a rate hike in August - at least if the economic data picks up a little - then a drift higher may be realised. 

EUR/USD
The pair has been making some gradual progress, picking up just over a cent from last week’s lows, but the gains do seem rather tentative. We’re still below 1.20 and any political updates from Italy will be closely followed. Concerns over what this might mean for the Euro could open up a return to low from late last year around 1.16-1.17

GBP/EUR
The pound failed to bounce back against the Euro at the end of last week after Thursday’s disappointing session. With nothing of note due out of the UK today, the potential seems to be far more weighted on disappointment from Europe. If this doesn’t materialise then a slide back to the March low 1.10 could follow.