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It's been a fairly lethargic London Session so far, which is typical in the build up to and FOMC/ ECB and NFP week. However, European politicians continue to dominate the headlines making the outcome of the ECB meeting even more difficult to predict.

  •  Waiting for direction from central bankers
  •  Germany throws a spanner in the ECB's works
  •  Economic data shows signs of stabilization in the US economy
  •  One to Watch: USDJPY


Waiting for direction from central bankers

Volume is fairly thin today and there is a slightly mixed tone to the markets. As we progress through the London afternoon there has been signs that investors are paring long bets on risk and short bets on the euro as we lead up to tomorrow's man event. However, the markets are barely moving and the dollar has hardly budged today, for example USDJPY has traded in a 20 pip range since the Asian session. When ranges tighten this tends to mean that investors are getting ready to pounce. See our ones to watch below for more details.

Germany throws a spanner in the ECB's works

Although the ECB is in a blackout zone prior to its meeting later this week there has been plenty of headline risk from German politicians that is keeping things interesting as we lead up to the ECB meeting. Chancellor Merkel's allies in her ruling coalition have rejected the idea of any of Europe's rescue funds being granted a banking licence. This is blow to those expecting the ECB to deliver some sort of big bazooka at this week's meeting. Without banking licence then the rescue funds - the EFSF and the ESM - only have approx. EU 500bn to bail out Spain and Italy, two at-risk economies. This hasn't helped sentiment in the bond markets: Spanish yields are 15 basis points higher today, above 6.75%. The markets want to hear that Germany will be the financial back-stop for the Eurozone, yet there are powerful sections of the German parliament that will not allow governments to be directly re-financed by the ECB. An official from Merkel's party said "It's clear that the ESM shouldn't become the ECB's bad bank". This, in theory, is good economics, but in practice especially during financially stressed situations, is unlikely to stymie this crisis and could push Spain and Italy even closer to a bailout that the Eurozone can't afford.

The result means a draining of sentiment this afternoon, although the impact on the euro has been fairly muted as EURUSD tests the air above 1.2300 yet again. 1.2330 remains key resistance and we expect this pair to trade in a range as we lead up to Draghi's press conference on Thursday. Downside could be capped at 1.2220 while 1.2330 then 1.2370 are key resistance levels in the short term. However, the obvious infighting between the ECB and the German politicians makes the outcome of the ECB meeting highly uncertain and right now the impact on the euro could go either way. Watch out for our ECB research note to get our view.

Economic data shows signs of stabilization in the US economy

There has also been some economic data worth noting today. In Europe, Italy's unemployment rate was much stronger than expected in June; rising to 10.8% (expectations had been for a rise to 10.3%). The overall Eurozone unemployment rate came in at 11.2%, which was in line with expectations, but still the highest level since the euro was introduced. In the US, consumer confidence was the stand-out report. It unexpectedly rose in July to 65.9 from 62.7 in June, which is the first rise in 5 months. Lower gas prices and a stabilisation in financial markets helped to boost confidence, although a weak jobs market continues to constrain spending. The S&P Case Shiller home price index also pointed to some stabilisation in the housing market, which may help confidence move higher in the medium-term. Essentially the US data today is another nail in the coffin to more stimulus from the Fed in the near -term.

Overall, the markets are likely to remain jittery as we lead up to the Fed tomorrow, and we don't expect much direction until these fundamental hurdles are over and done with by the end of this week.

Data watch:

One to Watch: USDJPY

As mentioned above this, the range in USDJPY has tightened to just 20 pips today. This usually does not persist, so this pair could be fairly volatile in the next couple of days. The trigger for a move will most likely be the conclusion of FOMC meeting tomorrow. If the Fed acts and takes more action (unlikely in our view) this is likely to be USDJPY negative and we could see this cross plunge back below 78.00 in the near-term as Treasury yields fall. However, if the Bank doesn't take new stimulative action then USDJPY may creep higher. The major resistance levels of note include 78.40 (the Tenkan line on the daily cloud) ahead of 79.00.

Our advice is for traders to take this period of calm in the markets to gather their thoughts, read our FOMC research note and plan their trading strategy for after the FOMC. Hopefully our USDJPY idea could spark some ideas of your own.




Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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