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Euro Waits at Key Resistance with All Eyes on ECB Rate Decision

Euro Waits at Key Resistance with All Eyes on ECB Rate Decision

2012-09-06 06:01:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • ECB Likely to Disappoint Hopes for Fully Realized Bond-Buying Scheme
  • Bank of England Set to Keep Policy on Hold as QE Boost, FLS Play Out
  • US Service-Sector ISM, ADP Jobs Data to Shape Outlook Before NFP

Volatility looks to be in the cards after another slow start to the trading week, with all eyes are on the European Central Bank monetary policy announcement. Expectations are running high – with EURUSD perched at key resistance – amid hopes that the central bank will finally deliver the bond-buying program alluded to in officials’ commentary over recent weeks and meant to contain borrowing costs for debt-strapped Eurozone member states. On balance, a disappointment on this front appears likely.

The bond purchase scheme is contingent on a formal bailout request by those countries whose bonds are to be supported by the central bank, meaning it would be functionally useless if Germany’s Constitutional Court rules the ESM rescue fund is incompatible with domestic law. A decision on this matter is expected September 12, so the ECB seems unlikely to risk its credibility by unveiling a program that may be made moot just days later.

That shifts the focus to growth-boosting policies, where possibilities include another round of LTROs, a further relaxation of collateral requirements for bank funding, and/or another outright interest rate cut. A strong effort to bolster output is likely to boost risk appetite considering the recession in the Eurozone amounts to the most significant headwind facing global growth this year.

Such a scenario is likely to offer a lift to sentiment-linked currencies including the Australian, Canadian and New Zealand Dollars. As for the Euro, the single currency may find support against havens including the US Dollar and Japanese Yen while suffering losses against its higher-yielding counterparts if stimulus is expanded (although gains may prove short-lived as the dilutive implications of monetary expansion factor in). Needless to say, if ECB policymakers opt not to move forward with growth-supportive measures, the opposite dynamic is likely to play out as risk aversion takes hold anew.

The Bank of England is likewise due to issue its interest rate announcement, but no changes to the existing policy mix as the MPC continues to evaluate the effects of the latest increase in asset purchases (which runs its course in November) and the new Funding for Lending Scheme (FLS). Later in the day, the focus will shift to the ISM Non-Manufacturing gauge of US service-sector growth as well as the ADP Employment report to set the stage for Friday’s critical Nonfarm Payrolls print. Traders continue to interpret US data through the prism of QE3 expectations, with softer outcomes likely to support risky assets (and vice versa).

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

1:30

AUD

Employment Change (AUG)

-8.8K

5.0K

11.7K (R-)

1:30

AUD

Unemployment Rate(AUG)

5.1%

5.3%

5.2%

1:30

AUD

Full Time Employment Change (AUG)

0.6K

-

7.6K

1:30

AUD

Part Time Employment Change (AUG)

-9.3K

-

4.1K (R-)

1:30

AUD

Participation Rate (AUG)

65.0%

65.2%

65.2%

2:00

JPY

Tokyo Avg Office Vacancies (%) (AUG)

9.17

-

9.30

Euro Session: What to Expect

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

5:30

EUR

French ILO Mainland Unemployment (2Q)

9.7% (A)

9.6%

Low

5:30

EUR

French Mainland Unemployment Change (2Q)

52K (A)

58K

Low

5:30

EUR

ILO Unemployment Rate (2Q)

10.2% (A)

10.0%

Low

7:00

GBP

Halifax House Price (3M/Y) (AUG)

-0.8%

-0.6%

Low

7:00

GBP

Halifax House Price (MoM) (AUG)

0.2%

-0.6%

Low

9:00

EUR

Euro-Zone GDP s.a. (QoQ) (2Q P)

-0.2%

-0.2%

Medium

9:00

EUR

Euro-Zone GDP s.a. (YoY) (2Q P)

-0.4%

-0.4%

Medium

9:00

EUR

Euro-Zone Gross Fixed Capital (QoQ) (2Q P)

-0.6%

-1.4%

Low

9:00

EUR

Euro-Zone Govt Expenditure (QoQ) (2Q P)

-0.2%

0.4%

Low

9:00

EUR

Euro-Zone Household Consum. (QoQ) (2Q P)

-0.2%

0.0%

Low

10:00

EUR

German Factory Orders s.a. (MoM) (JUL)

0.3%

-1.7%

Medium

10:00

EUR

German Factory Orders n.s.a. (YoY) (JUL)

-4.5%

-7.8%

Medium

11:00

GBP

BOE Asset Purchase Target (SEP)

375B

375B

High

11:00

GBP

Bank of England Rate Decision (SEP 6)

0.50%

0.50%

High

11:30

USD

Challenger Job Cuts (YoY) (AUG)

-44.5%

Low

11:45

EUR

European Central Bank Rate Decision (SEP 6)

0.50%

0.75%

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2527

1.2700

GBPUSD

1.5841

1.5949

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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