Don't forget that you can now follow's research team on Twitter:

This Thursday 6th September 2012 the ECB announces its interest rate decision at 1245 BST/ 0745 ET. The market consensus (as measured by Bloomberg) is for a 25 basis point cut to 0.50% from 0.75%. The main event will be ECB President Mario Draghi's press conference at 1330 BST/ 0830 ET.

There are two parts to Thursday's ECB meeting that investors should watch out for: 1, the rate cut, and 2, a potential announcement by President Draghi of unconventional monetary policy action. On balance we agree with consensus and believe that the ECB will cut rates on Thursday, however we think there is a 30% probability that some hawkish elements within the ECB (most notably the German Bundesbank) may vote against a rate cut due to the rise in German CPI in July. If the hawks are out-voted as expected then a rate cut should be negative for the euro as its yield differential with other currencies will have been eroded. Thus, we may see broad-based euro if the ECB cuts interest rates at Thursday's meeting. The biggest declines could be against the Swedish Krone, the Aussie dollar, the pound and the US dollar, as these currencies' central banks are expected to keep rates unchanged for the medium-term.

Draghi saves the day?

The second thing to watch out for is the unconventional monetary policy that may be announced during the press conference. Draghi pledged to "do what it takes" to protect the Eurozone at a meeting in July. At the August ECB meeting he said that the Bank would work on a new sovereign bond-buying plan to try and protect Spain and Italy from the bond vigilantes during times of sovereign stress. Since the August meeting there have been some clues about what to expect. We know that Draghi told a meeting of EU officials earlier this week that ECB purchases of sovereign debt with a maturity less than 3-years is not the same as government financing. However, we also know that that Germany remains against any type of government financing through bond purchases and media reports suggest the head of the Bundesbank has threatened to quit on the back of a potential new programme of support from the ECB. Thus, the outcome of Thursday's meeting is not clear cut. We need to wait to see what the ECB has hatched, however market expectation for some type of plan is high. Draghi's fateful speech in July has reduced the tail risk of a Eurozone break-up and contributed to the rally in risky assets this summer. The markets seem to be prepped to expect a "big bazooka" at this month's ECB meeting to obliterate the sovereign debt crisis and restore calm to peripheral bond markets.

What to expect: three potential outcomes

The first outcome: the disappointment. Draghi can't persuade the Bundesbank to agree to a bond-purchase scheme and instead the two factions agree on a rate cut to try and placate the markets while essentially passing the baton on to the politicians to try and sort out this crisis. We think there is a low probability of this happening because if the ECB doesn't deliver on Draghi's pledge to protect the currency bloc then its credibility would be damaged.

The second outcome is a middle road. The ECB agrees on a broad outline of a new bond-purchasing scheme that is more robust than the original SMP programme. It will allow the ECB to buy short-term bonds to ensure the effective "transmission of monetary policy". Thus, after more than two years, steps have been taken to give bond-buying a home within ECB monetary policy, which is a move towards the ECB becoming the lender of last resort for the currency bloc and more like the Fed and the BOE. However, we would expect the ECB to state that the plans won't be finalised until the outcome of a German Constitutional Court ruling on the legality of the Eurozone's long-term bailout fund the ESM. The initial reaction for European stocks and the euro could be mild disappointment, but we believe that EURUSD could find good support above 1.2455 - the top of the daily Ichimoku cloud, and this level could attract further buying interest back towards 1.2640 and maybe 1.27. We believe there is a high chance this will happen, and we call this the middle road.

The final outcome that we foresee is one where the ECB announces all the details of a bond buying plan and says it will buy unlimited amounts of bonds until Spanish and Italian yields reach a certain level. Although there is conditionality attached, Spain agrees to a formal sovereign bailout so the ECB can start buying bonds immediately. This would be euro positive, but we think there is virtually no chance of this happening on Thursday.

Overall, we don't see the September ECB meeting as being a game changer. We believe the ECB will lay out the broad strokes to further involvement and a new bond-buying programme, but that it won't commit until the outcome of the German court ruling. We think the most important meeting will be the October meeting, when the ECB will announce in detail its plan to purchase bonds and also, crucially, a start date for the purchases.

We do see some initial selling in the euro on Thursday. One to watch could be EURSEK, which has reached a key resistance level at 8.4310 - the 50-day moving average. It may be difficult for this pair to break above this level in the near to medium-term, so we could see some profit taking and a return to 8.40 then 8.35 could be on the cards.

Bank of England stays quiet

On Thursday 6th September at 1200 BST/ 0700 ET the Bank of England announces its rate decision. We agree with consensus and do not expect there to be any change to interest rates or its asset purchase programme. This meeting is unlikely to have any direct impact on the pound in the short or medium term.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e:| w:

23 College Hill | 3rd Floor | London EC4R 2RT

Now you can follow us on Twitter:

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.