European Trade Should be Quiet As Investors Pause Ahead of Event Risk

• Trade expected to be light ahead of key central bank rate decisions
• ECB narrowly expected to leave on hold although a lot of talk of potential rate cut
• Euro crosses remain under intense pressure
• Geopolitical issues resurface with talk of Iranian nuclear threat

Markets have been rather quiet on Thursday thus far and the moves could have a lot to do with the fact that traders are staying on the sidelines ahead of the key event risk later in the day in the form of the Bank of England and European Central Bank rate decisions due at 12:00GMT and 12:45GMT respectively. While no change is expected to Bank of England policy, with rates to be left at 0.50% and the APF at GBP275B, the European Central Bank decision could be more interesting with a greater chance for some additional monetary easing. The market consensus is for the ECB to leave rates on hold at 1.00%, but there has been a good deal of talk circulating in recent days suggesting the need for a rate cut given the severity of the Eurozone crisis.

Warnings from Fitch relating to the Eurozone, and comments from Italian PM Monti that a rate cut would be welcome, reflect this sentiment, and throw in added talk of contagion to Germany and the ECB decision becomes a lot less clear cut then it seems. In the interim, some Eurozone inflation data and Eurozone and UK industrial production are the key releases due in the European session and ahead of the event risk which could inspire some intraday volatility. The Euro crosses also remain in focus, with EUR/AUD, EUR/NZD by record lows and EUR/JPY by multi-year lows, all of which are severely oversold interday. Elsewhere, geopolitical issues have resurfaced with comments out from US and Japanese officials relating to Iran as a nuclear threat.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Although the Euro remains locked in a rather intense downtrend, daily studies are now looking quite stretched and from here, there are risks for some form of a short-term corrective bounce before underlying bear trend resumption. Look for a break back above 1.2820 to confirm, and trigger an interday double bottom that opens a move towards 1.3000. However, inability to break back above 1.2820 will keep pressure on downside, exposing a more direct test of next key downside barriers by 1.2500. Overall, the risks are tilted to the downside and we see an eventual depreciation towards 1.2000 over the coming weeks.

USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.

GBP/USD: The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported ahead of 1.5270. However, the latest breakdown below 1.5400 now opens the door for a break of the key October lows at 1.5270, below which will open a fresh downside extension back under 1.5000. Rallies should therefore now be well capped ahead of 1.5600.

USD/CHF: This market remains very well supported on any form of a dip and looks poised for a fresh upside extension towards 1.0000 over the coming weeks. Look for a daily close back above 0.9600 to confirm and accelerate. Ultimately, any dips should be used as formidable buy opportunities, while only back below 0.9000 would ultimately threaten the recovery outlook.

--- Written by Joel Kruger, Technical Currency Strategist

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