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There are two things that should be preoccupying the market's mind this afternoon: 1, how to navigate the global economic slowdown (data out of Europe today was truly horrible) and 2, how to prepare and position oneself for the ECB meeting tomorrow. We may have been given some help for the latter after the proposed ECB bond buying programme was leaked and hit the wires a short time ago. The leak, since denied by the central bank, suggested that ECB President Draghi would unveil an unlimited, programme of bond purchases, however unlike the BOE and the Fed's unconventional monetary stimulus it would be sterilised - hence the ECB would give money with one hand and take it away from somewhere else with the other. Apparently this plan has support from the majority of ECB members, presumably including Germany, which is the only good thing in the news in my view.

ECB - too little too late?

There are a few things to take from this leaked news: 1, the purchases will be sterilized, which means that it is not QE and thus the ECB is not the lender of last resort. Hence if this is a genuine description of what the ECB will offer then it may not be the type of grand-scale monetary action some in the market had expected. 2, No wonder it would have the majority of members' support - anything more aggressive could have been vetoed by the powerful Bundesbank. So if this is what we should expect tomorrow there are a couple of things to point out: 1, Draghi's comments that the ECB "will do whatever it takes to save the Eurozone" in July sound a bit hollow in September and 2, Draghi still hasn't managed to get Germany on board for the aggressive type of action that is needed to solve the Eurozone crisis.

This leaves us in a dilemma whereby the ECB is, yet again, doing too little too late. But this didn't stop EURUSD from rallying back to 1.26 earlier. However, we tend to think this is still a false break higher, and the FX market could be setting itself up for a fall, especially if Draghi's latest programme is only a half-way house to the ECB becoming the lender of last resort. 1.2430-50 remains a key support zone on any Draghi-inspired disappointment tomorrow.

To cut or not to cut...

The other part of the ECB meeting it is worth noting is that the market expects the ECB to cut rates by 0.25% to 0.50%. The latest economic data supports a rate cut with services sector PMI data for the currency bloc remaining in sub-50 territory in August. The composite index slipped to 47.2 from 47.9 in July, which is the seventh consecutive month in contractionary territory and also suggests that we are not yet at the bottom of this growth slump. This is also euro negative and supports a sell off tomorrow.

Life above 1.60 on the cards for GBPUSD?

The pound has rebounded strongly today after UK economic data surprised on the upside. Stronger manufacturing and service sector PMI's for August have been considered a sign by the market that the UK's growth slump is coming to an end. This doesn't support more stimulus from the Bank of England, which gives the pound a perceived yield differential over the US and Europe. Hence we saw GBPUSD break above 1.5912 - the resistance level that has capped gains over the past month. The next key resistance levels to watch are 1.5955 and 1.5995 ahead of that all important 1.60 level. Support lies at 1.5880. Life above 1.60 for cable depends on 1, economic data over the next few weeks and 2, the outcome of payrolls and the ECB.

CAD and Aussie weakness

Commodity currencies have also been volatile today. The Aussie continues to fall alongside iron ore, which dipped to a fresh 3-year low today. Although the overall commodity space is holding up well and market expectations for Aussie interest rates by the end of the year remain higher than they were in July, AUDUSD remains under pressure. The break below 1.02 support (the 100-day sma) is bearish and opens the way for a move to 1.0110 then to parity. The CAD also stole the limelight after the BOC kept rates on hold and maintained its hawkish bias. However, USDCAD didn't fall like a stone as you might have expected. Instead it surged back above 0.99 as some in the market may have read into the BOC statement a risk that inflation won't get back to its 2% target in the next 12 months, it is currently at 1.3%. We think this pair will be extremely volatile, but it could move back to the 0.9850 zone on the back of a good payrolls number on Friday, as US economic strength is good for its neighbour Canada.

Tomorrow is the main event. We may dawdle higher into tomorrow's ECB meeting in the middle of the London day, but we still think that unless Draghi unleashes a monetary beast that could destroy the Eurozone crisis once and for all then the markets will be a disappointed and a sell-off could ensue in the coming days. However, an outright collapse of the currency bloc and EURUSD seems to be off the cards now that the ECB has stepped in as chief fire-fighter.

One to watch: USDCAD: hourly chart

This pair is at risk of a sell off after today's bout of strength, especially if there is a strong payrolls number on Friday, as what is good for the US economy tends to be CAD positive. We would look for this pair to turn back towards 0.9850 in the coming days. See above for more detail. Resistance lies at 0.9930, support at 0.9845.


Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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