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There has been little to move the markets in any meaningful direction this morning apart from two German press articles that caused a bit of movement. The first was an article written by ECB President Draghi who urged the domestic readership to support the euro rescue plan. The second was an article in the highly respected Handesblatt, which suggested that the long-term Eurozone rescue fund already has a de-facto banking licence and does not need agreement from the German Constitutional Court. Why does this matter? Without a banking licence the ESM can't really solve the debt crisis and keep Italy and Spain out of danger, which could mean the end of the Eurozone. So if Handesblatt is correct then the ESM can get unlimited money from the ECB if the rules are interpreted in a certain way, thus the Eurozone's periphery could be saved. Does this make the Constitional Court ruling moot, and has Germany signed a blank cheque to save the Eurozone? We need to get more details, but at this stage the answer is perhaps.

The impact on the euro has been fairly muted and we did not see a surge in the euro after the Handesblatt article was released. While everyone wants Germany to save the Eurozone (none more so than ECB President Mario Draghi) no one wants them to do it by proxy, without knowing what they have signed up for, as that could cause even greater ructions within the currency bloc. For financial markets to remain calm and risky assets to continue to rally Germany has to willingly want to save its Eurozone partners, not be forced into it.

Why we all wait for Jackson Hole

Markets need direction, and while technical indicators and data releases can help with direction on an intra-day basis, I believe that the big directional changes in the current environment will come from central bankers. Hence Bernanke's speech at the Jackson Hole meeting on Friday along with the ECB meeting next Thursday remain pivotal events for traders of all shapes and sizes. The markets are gearing up for these events and until then everything else seems a bit like small change. The gold market has dried up, the dollar is trading in an incredibly tight range and the euro is trading with a bid tone, it remains above the top of the daily Ichimoku cloud at 1.2455- but has not been able to extend gains above 1.2570. The SPX 500 is caught in a tight range, with bulls unwilling to extend gains above 1,430 and the bears unwilling to push the index below 1,400. The markets are gearing up for a reaction: either Bernanke does announce more QE (or some form of it) which is dollar negative and good news for risky assets, or he stays tight lipped and risky assets crash off. Although it is not an ideal situation for fundamental traders like me, the fact is that central bankers control the ball game these days. They can solve the Eurozone crisis and bring confidence back to the peripheral debt markets, likewise, Bernanke and co. at the Fed have the power to pump the global economy full of freshly printed liquidity. Add to that the risk of a rate cut by China (the PBOC has tended to cut rates at the same time as the ECB of late) then the world could be a very different place next week where risk assets can get drunk on liquidity. Due to this, investors are unwilling to put on long-term directional positions preferring to wait for clarity from Bernanke and Draghi.

Norges Bank: won't act before the ECB

Data releases can't be ignored even though we are in no doubt that Jackson Hole is the most important place in the financial world this week. The Norges Bank kept rates steady today at 1.5%, the fourth consecutive month where rates have been left on hold. Rates are still at a near record low (they were at 1.25% in 2009) and the Bank reiterated that it was likely to keep rates at this level until at least the end of the year. The Bank sounded concerned about the level of the NOK, it surged to a 9-year high versus the euro earlier this month as crude oil prices continued to rise. Essentially the Norges Bank is not going to allow its superior financial position bring down its economy by boosting the NOK and thus it is likely to keep rates low for as long as the ECB looks likely to loosen monetary policy.

Elsewhere, German CPI was slightly stronger than expected and the revisions to Q2 GDP in the US were basically unchanged at 1.7%, although the personal consumption index, a key component of growth in the US, was revised higher to 1.7% from 1.5% initially.

Looking ahead to tomorrow, Italy's long-term bond auction at 1000BST will be one of the biggest tests for the market. Rome sold debt fairly easily today and yields were lower, however, 10-year yields have risen 15 basis points over the past week, which could be in anticipation of the auction tomorrow.

Ones to Watch: EURAUD

This cross is an interesting one; it can tend to rally when risk sentiment comes off, likewise, when the Eurozone crisis is in full swing it tends to sell off. Right now the Aussie has come under assault from weak Chinese and domestic data, in contrast the euro has been boosted by the unwinding of short positions. Looking ahead, if the ECB can deliver the goods next week then there could be a lot more unwinding of euro shorts which is EURAUD positive. Added to that, if Bernanke doesn't announce more stimulus during has Jackson Hole speech on Friday then the Aussie could be at risk. We would look to buy this cross on any weakness towards 1.2030-50 with a target of 1.2300. Interim resistance also lies at 1.22 (the 100-day sma) which could also attract some stickiness.



Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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