Markets on tenterhooks as investors eagerly anticipate outcome of ECB meeting

Tom Tong06/Sep/2012Currency Updates

USD

The greenback fell against most of it counterparts yesterday as traders showed relatively little risk aversion. On the other hand, there has been little significant data released from the US lately so it will be interesting to see the outcome today and tomorrow as there are multiple high tier events on both sides of the pond.

Between 1.15 and 1.30pm today there are three reports released from the US. First in line is the ADP Nonfarm Employment Change; the ADP is forecasted to fall from 163K to 140K, which should be considered negative for the greenback. The ADP is released before the crucial non-farm payroll employment data tomorrow and usually serves as a good indicator. On the other hand, unemployment data tomorrow is still forecasted to be released unchanged at 8.3%.

Next in line are jobless claims and the initial jobless claims, which are forecasted to be released pretty much unchanged, along expectations for tomorrow.

GBP

Yesterday there was plenty of movement on GBP/USD, as sterling started off bearish and then rallied against the dollar without the presence of any data release from the UK. Some believe that most of the support on sterling yesterday came from traders placing positions ahead of the MPC meeting today.

The most significant release from the meeting today is the interest rate decision which is most likely tipped to remain unchanged at 0.5%.

Later in the day, the movement of sterling will very much depend on its relative position to the EUR and USD following the crucial ECB meeting.

EUR

There is a busy day for the euro ahead after it had a successful day yesterday, edging up against most of its counterparts. First out at 10am is the eurozone GDP QoQ, which is forecast to remain unchanged. One hour later German factory orders are set to be released, forecast for a positive increase to 0.2% since last month when it decreased -1.7%.

At 12.45pm the ECB will publish its interest decision which has been a talking point about the euro for a while now.

Some analysts forecast this to be unchanged but the market consensus measured by Bloomberg suggest a belief of a cut of 25 basis points to 0.5%. If the interest rate is cut, there are a number of economic implications that could follow, but one to mention is that we could move into negative territory. If the ECB wants to keep the 75 basis point gap between the lending and deposit rate, it would result in banks having to pay out to the ECB for depositing extra cash which might alter the way they place money.

At 1.30pm we will see the much anticipated press conference held by the president of the ECB, Mario Draghi. The key point to watch out for is any unconventional monetary policy that might be announced. As Draghi earlier in July pledged that they would “do what it takes” in order to protect the eurozone. Further, in August, the ECB said they were looking at a new plan for sovereign bond-buying to protect states in the zone during times of sovereign stress.

Earlier this week Draghi was quoted telling EU officials that “purchases of sovereign debt with a maturity less than 3-years is not the same as government financing”. Government financing through bond purchases is something Germany has been openly opposing and the Bundesbank has threatened to stay away from any such plan.

Markets seem to be anticipating a magic bullet at this month’s ECB meeting to cure the sovereign debt crisis, and the press conference will be crucial in enforcing confidence in the market.

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Written by Tom Tong

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