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As if to remind us that Bernanke is not the only show on the road in the next few weeks Eurozone officials have been out in force today to remind us that the ECB meeting next Thursday is also going to be a major driver of markets in the medium term. The headline risk from the currency bloc kicked off this morning with two press reports: 1, the head of the Bundesbank has reportedly threatened to resign in recent weeks on the back of negotiations for ECB policy action to try and stem the debt crisis, and 2, reports that the ECB is trying to get control of all Europe's banks and essentially negate the power of national banking regulators, which is both another dent in the Euro-area's states' national sovereignty and also resisted by Germany, according to reports.

The news flow didn't stop there. Merkel reiterated her support for Jens Weidmann, the head of the Bundesbank, suggesting rumours of his resignation were not just smoke without fire. The last thing the ECB needs is a change of personnel at the top, so if this story develops it could cause some adverse reaction in euro-based assets. After that the ECB's Coeure said that the ECB is studying ways of intervening in the short-term bond market based on "strict conditionality and the EFSF/ ESM programme". The market has been prepped to expect some policy announcement from the ECB at next week's meeting and if they don't deliver then the Bank will be accused of misleading the markets. However, ECB members like Coeure have been extremely clear: there will be no bond purchases if Spain does not apply for formal aid from the EFSF/ ESM. Right now that seems unlikely especially since Spain's prime minister yesterday delayed seeking official financial help even though more autonomous regions of the Iberian nation continue to tap the country's own EU18bn bailout fund.

The problem facing the ECB was highlighted in today's data releases: inflation was up - rising to 2.6% in August up from 2.4% in July, while unemployment reached a new record high of 11.3% in July. How does the Bank help countries like Spain re-build their wrecked economies when inflation hawks like the Bundesbank remain resistant to anything that smacks of government financing. This is the real problem that needs to be solved, the question is will it be solved by next Thursday? As we lead up to Bernanke EURUSD is above 1.26 after a plunge in the dollar and some pricing in of a dovish Fed speech. But could it be investors trying to bid up the price only to sell at a better rate? Perhaps, as we noted in our Jackson Hole preview, Bernanke didn't deliver much last year and he could do the same again in 2012 - saying what the Fed could do without promising anything.

One to Watch

Elsewhere, Canada's economy is holding up extremely well. In June the economy grew by 0.2%, the annual rate stayed steady at 2.4%, for the second quarter as a whole the economy expanded at a 1.8% annual rate. That is fairly good, especially compared with the Eurozone or the UK, which are both experiencing contracting economies. This helped the CAD to surge against the dollar and USDCAD fell through 0.9900 on the announcement. Near-term support lies at 0.9840 then 0.9800 - a major support level that the market will now be eyeing. If Bernanke is particularly dovish at Jackson Hole today then 0.9800 could be on the cards, which was a double bottom for this pair from April. The daily MACD doesn't look oversold yet, so there could be further downside for this pair.

Chart: USDCAD daily


Overall, it's still all about Bernanke today, and along with USDJPY, USDCAD - as it approaches the key 0.9800 level - are both our ones to watch.

For now, it's over to Ben at Jackson Hole. Read our Week Ahead, which will be released later today, to get our take on Bernanke's musings.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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